SAVINGS  U-. 


OF 


COMPAN 


K 


- 


\ 


\ 


INTERNATIONAL  FINANCE 


INTERNATIONAL 
FINANCE 


L  I  B  R  A  R  Y    OF 
SAVINGS  UNlOu  uANK  AND  TRUST  COMPAN 


BY 

HARTLEY   WITHERS 


NEW  YORK 
E.  P.  BUTTON  &  COMPANY 

681  FIFTH  AVENUE 
1916 


COPYRIGHT,  1916 

BY 
E.  P.  BUTTON  &  COMPANY 


Printed  in  the  U.  S.  A. 


HQr 


PREFACE  TO  THE  AMERICAN  EDITION 

INTERNATIONAL  FINANCE  is  a  subject  with  which 
American  readers  have  hitherto  been  very 
little  troubled,  being  freed  from  its  intricacies 
by  the  fact  that .  their  own  country,  with  its 
boundless  powers  and  resources  awaiting  de- 
velopment, has  clamoured  for  all  the  finance 
that  they,  and  others,  were  able  to  put  into 
it.  Now  they  suddenly  find  themselves  inter- 
national moneylenders  on  a  great  scale  and  it 
may  interest  some  of  them  to  read  about  the 
machinery  of  moneylending  among  nations,  as 
it  has  been  practised  by  the  investors  and  finan- 
ciers of  the  Old  World,  and  then  to  enjoy  their 
usual  happy  privilege  of  benefiting  by  the  ex- 
perience and  mistakes  of  older  countries.  This 
book  was  originally  written  for  English  readers 
and  from  the  English  point  of  view,  and 
though  some  slight  attempt  has  been  made  to 
revise  it  for  publication  in  America,  it  still 

iii 


iv       Preface  to  the  American  Edition 

chiefly  presents  the  experience  and  machinery 
of  England,  as  the  country  in  which  Inter- 
national Finance  has,  so  far,  been  longest  and 
most  extensively  worked. 

HARTLEY  WITHERS. 
LONDON,  May,  1916. 


PREFACE  TO  THE  ENGLISH  EDITION 

RESPONSIBILITY  for  the  appearance  of  this  book 
— but  not  for  its  contents — lies  with  the  Council 
for  the  Study  of  International  Relations,  which 
asked  me  to  write  one  "explaining  what  the 
City  really  does,  why  it  is  the  centre  of  the 
world's  Money  Market,"  etc.  In  trying  to  do 
so,  I  had  to  go  over  a  good  deal  of  ground 
that  I  had  covered  in  earlier  efforts  to  throw 
light  on  the  machinery  of  money  and  the  Stock 
Exchange;  and  the  task  was  done  amid  many 
distractions,  for  which  readers  must  make  as 
kindly  allowance  as  they  can. 

HARTLEY  WITHERS. 

6,  LINDEN  GARDENS,  W. 
March,  1916. 


CONTENTS 

CHAPTER  I 
CAPITAL  AND  ITS   REWARD 

PAGE 

Finance  the  machinery  of  money-dealing — Lenders  and  bor- 
rowers— Capital  and  its  claim  to  reward — Stored-up  work 
— Inherited  wealth — The  reward  of  services — Question- 
able services — Charles  the  Second's  dukedoms — Modern 
equivalents — Workers  and  savers  .....  I 

CHAPTER  II 
BANKING  MACHINERY 

Money  at  a  bank — Bills  of  exchange — Finance  and  industry — 
Supremacy  of  bill  on  London — London's  freedom — The 
Bank  of  England — The  great  joint  stock  banks — The  dis- 
count market — Bills  and  trade— -Reorganization  of  the 
American  banking  system — America's  leading  position  in 
international  finance  .......  24 

CHAPTER   III 
INVESTMENTS  AND   SECURITIES 

Stock  Exchange  securities — Government  and  municipal  loans 
— Machinery  of  loan  issue — Underwriting — The  Prospectus 
— Sinking  fund — Bonds  and  coupons — Registered  stocks — 
Companies'  securities — Stock  Exchange  dealings  .  .  43 

CHAPTER   IV 
FINANCE  AND   TRADE 

Why  money  goes  abroad — Trade  before  finance — Prejudice  in 
favour  of  home  investments — Prejudice  against  them — 
The  reaction — Mexico  and  Brazil — Neutral  moneylenders 
and  the  war — Goods  and  services  lent  and  borrowed — The 
trade  balance 66 

vii 


viii  Contents 

CHAPTER  V 
THE  BENEFITS  OF  INTERNATIONAL  FINANCE 

PAGE 

International  finance  and  trade — Opening  up  the  world — Ex- 
change of  products — Finance  as  peacemaker — Popular  de- 
lusions concerning  financiers — Financiers  and  the  present 
war — The  cases  of  Egypt  and  the  Transvaal — Diplomacy 
and  finance  '  .  .  .  .  .  .  .  .86 

CHAPTER  VI 
THE  EVILS  OF  INTERNATIONAL  FINANCE 

Anti-Semitic  prejudice — The  story  of  the  Honduras  loans — 
The  problem  to  be  faced  by  issuing  houses — Their  moral 
obligations,  responsibilities,  and  difficulties — Bad  finance 
and  big  profits — The  public's  responsibility  .  .  .112 

CHAPTER  VII 
NATIONALISM  AND  FINANCE 

Dangers  of  over-specialization — Analogy  between  State  and 
individual — Versatility  of  the  savage — Specialization  and 
peace — Specialization  and  war — Should  the  export  of 
capital  be  regulated?  .......  154 

CHAPTER  VIII 
REMEDIES  AND   REGULATIONS 

Regulation  of  issues  by  Stock  Exchange  Committee — Danger 
arising  therefrom — Difficulty  of  controlling  capital — Best 
remedy  is  keener  appreciation  by  issuing  houses,  bor- 
rowers, and  investors  of  evils  of  bad  finance — Candour  in 
prospectuses — War  as  financial  schoolmaster — War  as 
destroyer  of  capital — War  as  stimulator  of  productive 
activity 170 

INDEX 185 


INTERNATIONAL   FINANCE 


CHAPTER  I 

CAPITAL  AND   ITS   REWARD 

FINANCE,  in  the  sense  in  which  it  will  be  used 
in  this  book,  means  the  machinery  of  money 
dealing.  That  is,  the  machinery  by  which 
money  that  you  and  I  save  is  put  together 
and  lent  out  to  people  who  want  to  borrow  it. 
Finance  becomes  international  when  our  money 
is  lent  to  borrowers  in  other  countries,  or  when 
people  in  this  country,  who  want  to  start  an 
enterprise,  get  some  or  all  of  the  money  that 
they  need,  in  order  to  do  so,  from  lenders  abroad. 
The  biggest  borrowers  of  money,  in  most  coun- 
tries, are  the  Governments,  and  so  international 
finance  is  largely  concerned  with  lending  by 
the  citizens  of  one  country  to  the  Govern- 
ments of  others,  for  the  purpose  of  developing 


2  Capital  and  Its  Reward 

their  wealth,  building  railways  and  harbours  or 
otherwise  increasing  their  power  to  produce. 

Money  thus  saved  and  lent  is  capital.  So 
finance  is  the  machinery  that  handles  capital, 
collects  it  from  those  who  save  it  and  lends  it 
to  those  who  want  to  use  it  and  will  pay  a  price 
for  the  loan  of  it.  This  price  is  called  the  rate 
of  interest,  or  profit.  The  borrower  offers  this 
price  because  he  hopes  to  be  able,  after  paying 
it,  to  benefit  himself  out  of  what  he  is  going  to 
make  or  grow  or  get  with  its  help,  or  if  it  is  a 
Government  because  it  hopes  to  improve  the 
country's  wealth  by  its  use.  Sometimes  bor- 
rowers want  money  because  they  have  been 
spending  more  than  they  have  been  getting, 
and  try  to  tide  over  a  difficulty  by  paying  one 
set  of  creditors  with  the  help  of  another,  instead 
of  cutting  down  their  spending.  This  path,  if 
followed  far  enough,  leads  to  bankruptcy  for  the 
borrower  and  loss  to  the  lender. 

If  no  price  were  offered  for  capital,  we  should 
none  of  us  save,  or  if  we  saved  we  should  not 
risk  our  money  by  lending  it,  but  hide  it  in  a 
hole,  or  lock  it  up  in  a  strong  room,  and  so 
there  could  be  no  new  industry. 


Capital's  Function  3 

Since  capital  thus  seems  to  be  the  subject- 
matter  of  finance  and  it  is  the  object  of  this 
book  to  make  plain  what  finance  does,  and 
how,  it  will  be  better  to  begin  with  clear  under- 
standing of  the  function  of  capital.  All  the 
more  because  capital  is  nowadays  the  object  of 
a  good  deal  of  abuse,  which  it  deserves  only 
when  it  is  misused.  When  it  is  misused,  let  us 
abuse  it  as  heartily  as  we  like,  and  take  any 
possible  measures  to  punish  it.  But  let  us 
recognize  that  capital,  when  well  and  fairly  used, 
is  far  from  being  a  sinister  and  suspicious  weapon 
in  the  hands  of  those  who  have  somehow  man- 
aged to  seize  it;  but  is  in  fact  so  necessary  to 
all  kinds  of  industry,  that  those  who  have 
amassed  it,  and  placed  it  at  the  disposal  of 
industry  render  a  service  to  society  without 
which  society  could  not  be  kept  alive. 

For  capital,  as  has  been  said,  is  money  saved 
and  lent  to,  or  employed  in,  industry.  By 
being  lent  to,  or  employed  in,  industry  it  earns 
its  rate  of  interest  or  profit.  There  are  now- 
adays many  wise  and  earnest  people  who  think 
that  this  interest  or  profit  taken  by  capital  is 
not  earned  at  all  but  is  wrung  out  of  the  workers 


4  Capital  and  Its  Reward 

by  a  process  of  extortion.  If  this  view  is  correct 
then  all  finance,  international  and  other,  is 
organized  robbery,  and  instead  of  writing  and 
reading  books  about  it,  we  ought  to  be  putting 
financiers  into  prison  and  making  a  bonfire  of 
their  bonds  and  shares  and  stock  certificates. 
But,  with  all  deference  to  those  who  hold  this 
view,  it  is  based  on  a  complete  misapprehension 
of  the  nature  and  origin  of  capital. 

Capital  has  been  described  above  as  money 
put  to  certain  purposes.  This  was  done  for 
the  sake  of  clearness  and  because  this  definition 
fits  in  with  the  facts  as  they  usually  happen  in 
these  days.  Economists  define  capital  as  wealth 
reserved  for  production,  and  we  must  always 
remember  that  money  is  only  a  claim  for,  or  a 
right  to,  a  certain  amount  of  goods  or  a  certain 
amount  of  other  people's  work.  Money  is 
only  a  title  to  wealth,  because  if  I  have  a  ten- 
dollar  note  in  my  pocket,  I  thereby  have  the 
power  of  buying  ten  dollars'  worth  of  goods  or  of 
hiring  a  doctor  to  cure  me  or  a  parson  to  bury 
me  or  anybody  else  to  do  anything  that  I  want, 
up  to  the  buying  power  of  ten  dollars.  This 
is  the  power  that  money  carries  with  it.  When 


Stored-up  Work  5 

the  owner  of  this  power,  instead  of  exercising  it 
in  providing  himself  with  luxuries  or  amuse- 
ments, uses  it  by  lending  it  to  someone  who 
wants  to  build  a  factory,  and  employ  workers, 
then,  because  the  owner  of  the  money  receives 
his  rate  of  interest  he  is  said  to  be  exploiting 
labour,  because,  so  it  is  alleged,  the  workers 
work  and  he,  the  capitalist,  sits  in  idleness  and 
lives  on  their  labour. 

And  so,  in  fact,  he  does.  But  we  have  not 
yet  found  out  how  he  got  the  money  that  he 
lent.  That  money  can  have  been  got  only  by 
work  done  or  services  rendered,  for  which  other 
people  were  ready  to  pay.  Capital,  looked  at 
from  this  point  of  view,  is  simply  stored -up  work, 
and  entitled  to  its  reward  just  as  much  as  the 
work  done  yesterday.  The  capitalist  lives  on 
the  work  of  others,  but  he  can  do  so  only  be- 
cause he  has  wrought  himself  in  days  gone  by 
or  because  someone  else  has  wrought  and  handed 
on  to  him  the  fruits  of  his  labour.  Let  us  take 
the  case  of  a  shopkeeper  who  has  saved  a  thou- 
sand dollars.  This  is  his  pay  for  work  done  and 
risk  taken  (that  the  goods  which  he  buys  may 
not  appeal  to  his  customers)  during  the  years 


6  Capital  and  Its  Reward 

in  which  he  has  saved  it.  He  might  spend  his 
thousand  dollars  on  a  motor  car,  or  on  furniture, 
or  a  piano,  and  nobody  would  deny  his  right  to 
do  so.  On  the  contrary  he  would  probably  be 
applauded  for  giving  employment  to  makers  of 
the  articles  that  he  bought.  Instead  of  thus 
consuming  the  fruit  of  his  work  on  his  own 
amusement,  and  the  embellishment  of  his  home, 
he  prefers  to  make  provision  for  his  old  age. 
He  invests  his  thousand  dollars  in  the  5  per 
cent,  mortgage  bonds  of  a  company  being  formed 
to  extend  a  boot  factory.  Thereby  he  gives 
employment  to  the  people  who  build  the  exten- 
sion and  provide  the  machinery,  and  thereafter 
to  the  men  and  women  who  work  in  the  factory, 
and  moreover  he  is  helping  to  supply  other 
people  with  boots.  He  sets  people  to  work  to 
supply  other  people's  wants  instead  of  his  own, 
and  he  receives  as  the  price  of  his  service  fifty 
dollars  a  year.  But  it  is  his  work,  that  he  did 
in  the  years  in  which  he  was  saving,  that  is 
earning  him  this  reward. 

An  interesting  book  has  lately  appeared 
called  Income,  in  which  the  writer,  Dr.  Scott 
Nearing,  of  the  University  of  Pennsylvania, 


Property  Income  7 

draws  a  very  sharp  distinction  between  service 
income  and  property  income,  implying,  if  I 
read  him  aright,  that  property  income  is  an 
unjust  extortion.  This  is  how  he  states  his 
case:* 

"The  individual  whose  effort  creates  values 
for  which  society  pays  receives  service  income. 
His  reward  is  a  reward  for  his  personality,  his 
time,  his  strength.  Railroad  president  and 
roadmender  devote  themselves  to  activities 
which  satisfy  the  wants  of  their  fellows.  Their 
service  is  direct.  In  return  for  their  hours  of 
time  and  their  calories  of  energy,  they  receive 
a  share  of  the  product  which  they  have  helped 
to  produce. 

"The  individual  who  receives  a  return  be- 
cause of  his  property  ownership,  receives  a 
property  income.  This  man  has  a  title  deed 
to  a  piece  of  unimproved  land  lying  in  the  centre 
of  a  newly  developing  town.  A  storekeeper 
offers  him  a  thousand  dollars  a  year  for  the 
privilege  of  placing  a  store  on  the  land.  The 
owner  of  the  land  need  make  no  exertion.  He 
simply  holds  his  title.  Here  a  man  has  labored 
for  twenty  years  and  saved  ten  thousand  dollars 
by  denying  himself  the  necessaries  of  life.  He 
invests  the  money  in  railroad  bonds,  and  some- 
one insists  he  thereby  serves  society.  In  one 
sense  he  does  serve.  In  another,  and  a  larger 

*  Pages  24,  25. 


8  Capital  and  Its  Reward 

sense,  he  expects  the  products  of  his  past  service 
(the  twenty  years  of  labor),  to  yield  him  an 
income.  From  the  day  when  he  makes  his 
investment  he  need  never  lift  a  finger  to  serve 
his  fellows.  Because  he  has  the  investment, 
he  has  income.  The  same  would  hold  true  if 
the  ten  thousand  dollars  had  been  left  him  by  his 
father  or  given  to  him  by  his  uncle.  .  .  .  The 
fact  of  possession  is  sufficient  to  yield  him  an 
income." 


Now,  in  all  these  cases  of  property  income 
which  Dr.  Nearing  seems  to  regard  as  examples 
of  income  received  in  return  for  no  effort,  there 
must  have  been  an  effort  once,  on  the  part  of 
somebody,  which  put  the  maker  of  it  in  pos- 
session of  the  property  which  now  yields  an 
income  to  himself,  or  those  to  whom  he  has  left 
or  given  it.  First  there  is  the  case  of  the  man 
who  has  a  title  deed  to  a  piece  of  land.  How 
did  he  get  it?  Either  he  was  a  pioneer  who 
came  and  cleared  it  and  settled  on  it,  or  he  had 
worked  and  saved  and  with  the  product  of  his 
work  had  bought  this  piece  of  land,  or  he  had 
inherited  it  from  the  man  who  had  cleared  or 
bought  the  land.  The  ownership  of  the  land 
implies  work  and  saving  and  so  is  entitled  to 


Work  and  Saving  9 

its  reward.  Then  there  is  the  case  of  the  man 
who  has  saved  ten  thousand  dollars  by  labour- 
ing for  twenty  years  and  denying  himself  the 
necessaries  of  life.  Dr.  Nearing  admits  that 
this  man  has  worked  in  order  to  get  his  dollars; 
he  even  goes  so  far  as  to  add  that  he  had  denied 
himself  the  necessaries  of  life  in  order  to  save. 
Incidentally  one  may  wonder  how  a  man  who 
has  denied  himself  the  necessaries  of  life  for 
twenty  years  can  be  alive  at  the  end  of  them. 
This  man  has  worked  for  his  dollars,  and,  in- 
stead of  spending  them  on  immediate  enjoyment, 
lends  them  to  people  who  are  building  a  railway, 
and  so  is  quickening  and  cheapening  intercourse 
and  trade.  Dr.  Nearing  seems  to  admit  grudg- 
ingly that  in  a  sense  he  thereby  renders  a  service, 
but  he  complains  because  his  imaginary  investor 
expects  without  further  exertion  to  get  an 
income  from  the  product  of  his  past  service. 
If  he  could  not  get  an  income  from  it,  why 
should  he  save?  And  if  he  and  millions  of 
others  did  not  save  how  could  railways  or  facto- 
ries be  built?  And  if  there  were  no  railways  or 
factories  how  could  workers  find  employment? 
If  every  capitalist  only  got  income  from  the 


io  Capital  and  Its  Reward 

product  of  his  own  work  in  the  past,  which  he 
had  spent,  as  in  this  case,  on  developing  industry, 
his  claim  to  a  return  on  it  would  hardly  need 
stating.  He  would  have  saved  his  ten  thousand 
dollars,  and  instead  of  spending  it  on  ten  thou- 
sand dollars'  worth  of  amusement  or  pleasure 
for  himself  he  would  have  preferred  to  put  it  at 
the  disposal  of  those  who  are  in  need  of  capital 
for  industry  and  promise  to  pay  him  5  per  cent, 
or  $500  a  year  for  the  use  of  it.  By  so  doing  he 
increases  the  demand  for  labour,  not  moment- 
arily as  he  would  have  done  if  he  had  spent  his 
money  on  goods  and  services  immediately  con- 
sumed, but  for  all  time,  as  long  as  the  railroad 
that  he  helps  to  build  is  running  and  earning 
an  income  by  rendering  services.  He  is  a  bene- 
factor to  humanity  as  long  as  his  capital  is 
invested  in  a  really  useful  enterprise,  and  espe- 
cially to  the  workers  who  cannot  get  work  unless 
the  organizers  of  industry  are  supplied  with 
plenty  of  cheap  capital.  In  fact,  the  more 
plentiful  and  cheap  is  capital,  the  keener  will 
be  the  demand  for  the  labour  of  the  workers. 

But  when  Dr.  Nearing  points  out  that  the 
income  of  the  ten  thousand  dollars  would  be 


Inherited  Wealth  n 

equally  secure  if  the  owner  of  them  had  them 
left  him  by  his  father  or  given  him  by  his  uncle, 
then  at  last  he  smites  capital  on  a  weak  point 
in  its  armour.  There  is,  without  question, 
much  to  be  said  for  the  view  that  it  is  unfair 
that  a  man  who  has  worked  and  saved  should 
thereby  be  able  to  hand  over  to  his  son  or 
nephew,  who  has  never  worked  or  saved,  this 
right  to  an  income  which  is  derived  from  work 
done  by  somebody  else.  It  seems  unfair  to  all 
of  us,  who  were  not  blessed  with  equally  in- 
dustrious and  provident  fathers  and  uncles, 
and  it  is  often  bad  for  the  man  who  gets  the 
income  as  a  reward  for  no  effort  of  his  own; 
because  it  gives  him  a  false  start  in  life  and 
sometimes — especially  in  sleepy  old  countries, 
where  it  is  fashionable  to  be  idle — tends  to 
make  him  a  futile  waster,  who  can  justify  his 
existence  and  his  command  over  other  people's 
work,  only  by  pointing  to  the  efforts  of  his 
deceased  sire  or  uncle.  Further,  unless  he  is 
very  lucky,  he  is  likely  to  grow  up  with  the 
notion  that,  just  because  he  has  been  left  or 
given  a  certain  income,  he  is  somehow  a  superior 
person,  and  that  it  is  part  of  the  scheme  of  the 


12  Capital  and  Its  Reward 

universe  that  others  should  work  for  his  benefit, 
and  that  any  attempt  on  the  part  of  other  people 
to  get  a  larger  share,  at  his  expense,  of  the  good 
things  of  the  earth  is  an  attempt  at  robbery. 
He  is,  by  being  born  to  a  competence,  out  of 
touch  with  the  law  of  nature,  which  says  that 
all  living  things  must  work  for  their  living,  or 
die,  and  his  whole  point  of  view  is  likely  to  be 
warped  and  narrowed  by  his  unfortunate  good 
fortune. 

These  evils  that  spring  from  hereditary  prop- 
erty are  obvious.  But  it  may  be  questioned 
whether  they  outweigh  the  advantages  that 
arise  from  it.  The  desire  to  possess  is  a  strong 
stimulus  to  activity  in  production,  because 
possession  is  the  mark  of  success  in  it,  and  all 
healthy-minded  men  like  to  feel  that  they  have 
succeeded;  and  almost  equally  strong  is  the 
desire  to  hand  on  to  children  or  heirs  the  pos- 
sessions that  the  worker's  energy  has  got  for 
him.  In  fact  it  may  almost  be  said  that  in 
most  men's  minds  the  motive  of  possession 
implies  that  of  being  able  to  hand  on;  they 
would  not  feel  that  they  owned  property  which 
they  were  bound  to  surrender  to  the  State  at 


Inherited  Wealth  13 

their  deaths.  If  and  when  society  is  ever  so 
organized  that  it  can  produce  what  it  needs 
without  spurring  the  citizen  to  work  with  the 
inducement  supplied  by  possession,  and  the 
power  to  hand  on  property,  then  it  may  be 
possible  to  abolish  the  inequities  that  heredi- 
tary property  carries  with  it.  As  things  are 
at  present  arranged  it  seems  that  we  are  bound 
to  put  up  with  them  if  the  community  is  to  be 
fed  and  kept  alive.  At  least  we  can  console 
ourselves  with  the  thought  that  property  does 
not  come  into  existence  by  magic.  Except  in 
the  case  of  the  owners  of  land  who  may  be  en- 
riched without  any  effort  by  the  discovery  of 
minerals  or  by  the  growth  of  a  city,  capital  can 
only  have  been  created  by  services  rendered; 
and  even  in  the  case  of  owners  of  land,  they,  and 
those  from  whom  they  derived  it,  must  have 
done  something  in  order  to  get  the  land. 

It  is,  of  course,  quite  possible  that  the  some- 
thing which  was  done  was  a  service  which  would 
not  now  be  looked  on  as  meriting  reward.  In 
the  medieval  days  mailclad  robbers  used  to  get 
(quite  honestly  and  rightly  according  to  the 
notions  then  current)  large  grants  of  land  be- 


14  Capital  and  Its  Reward 

cause  they  had  ridden  by  the  side  of  their  feudal 
chiefs  when  they  went  on  marauding  forays. 
In  later  times,  as  in  the  days  of  England's  Merry 
Monarch,  attractive  ladies  were  able  to  found 
ducal  families  by  placing  their  charms  at  the 
service  of  a  royal  debauchee.  But  the  rewards 
of  the  freebooters  have  in  almost  all  cases  long 
ago  passed  into  the  hands  of  those  who  pur- 
chased them  with  the  proceeds  of  effort  with 
some  approach  to  economic  justification;  and 
though  some  of  Charles  the  Second's  dukedoms 
are  still  extant,  it  will  hardly  be  contended  that 
it  is  possible  to  trace  the  origin  of  everybody's 
property  and  confiscate  any  that  cannot  show 
a  reasonable  title,  granted  for  some  true  eco- 
nomic service. 

What  we  can  do,  and  ought  to  do,  if  economic 
progress  is  to  move  along  right  lines,  is  to  try 
to  make  sure  that  we  are  not,  in  these  days  of 
alleged  enlightenment,  committing  out  of  mere 
stupidity  and  thoughtlessness,  the  crime  which 
Charles  the  Second  perpetrated  for  his  own 
amusement.  He  gave  large  tracts  of  England 
to  his  mistresses  because  they  pleased  his  rov- 
ing fancy.  Now  the  power  to  dispense  wealth 


Dispensing  Wealth  15 

has  passed  into  the  hands  of  the  people,  who 
buy  the  goods  and  services  produced,  and  so 
decide  what  goods  and  services  will  find  a  mar- 
ket, and  so  will  enrich  their  producers.  Are 
we  making  much  better  use  of  it?  On  the 
whole,  much  better;  but  we  still  make  far  too 
many  mistakes.  The  people  to  whom  nowadays 
we  give  big  fortunes,  though  they  include  a 
large  number  of  organizers  of  useful  industry, 
also  number  within  their  ranks  a  crowd  of 
hangers-on  such  as  market-riggers,  and  vendors 
of  patent  pills  or  bad  stuff  to  read.  These  folk, 
and  others,  live  on  our  vices  and  stupidities, 
and  it  is  our  fault  that  they  can  do  so.  Be- 
cause a  large  section  of  the  public  likes  to  gamble 
away  its  money  on  race  courses  or  the  stock 
markets,  substantial  fortunes  have  been  founded 
by  those  who  have  provided  the  public  with 
this  means  of  amusement.  Because  the  public 
likes  to  be  persuaded  by  the  clamour  of  cheap- 
jack  advertisement  that  its  inside  wants  certain 
medicines,  and  that  these  medicines  are  worth 
buying  at  a  price  that  makes  the  vendor  a 
millionaire,  there  he  is  with  his  million.  Some 
people  say  that  he  has  swindled  the  public. 


16  Capital  and  Its  Reward 

The  public  has  swindled  itself  by  allowing  him 
to  foist  stuff  down  its  throat  on  terms  which 
give  him,  and  his  heirs  and  assigns  after  him, 
all  the  control  over  the  work  and  wealth  of  the 
world  that  is  implied  by  the  possession  of  a 
million.  When  we  buy  rubbish  we  do  not  only 
waste  our  money  to  our  own  harm,  but,  under 
the  conditions  of  modern  society,  we  put  the 
sellers  of  rubbish  in  command  of  the  world,  as 
far  as  the  money  power  commands  it,  which  is 
a  good  deal  further  than  is  pleasing. 

Hence  it  is  that  when  some  of  those  who 
question  the  right  of  capital  to  its  reward,  do 
so  on  the  ground  that  capital  is  often  acquired 
by  questionable  means,  they  are  barking  up 
the  wrong  tree.  Capital  can  be  acquired  only 
by  selling  something  to  you  and  me.  If  you 
and  I  had  more  sense  in  the  matter  of  what  we 
buy,  capital  could  not  be  acquired  by  question- 
able means.  By  our  greed  and  wastefulness 
we  give  fortunes  to  market-riggers  and  money- 
lenders. By  our  preference  for  "brilliant'* 
investments,  with  a  high  rate  of  interest  and  bad 
security,  we  invite  the  floating  of  rotten  com- 
panies and  the  issue  of  waterlogged  securities. 


Our  Responsibility  17 

By  our  readiness  to  be  deafened  by  the  clamour 
of  the  advertiser  into  buying  things  that  we  do 
not  want,  we  hand  industry  over  to  the  hands 
of  the  loudest  shouter,  and  by  our  half -educated 
laziness  in  our  selection  of  what  we  read  and 
of  the  entertainments  that  we  frequent,  we  open 
the  way  to  opulence  through  the  debauching 
of  our  taste  and  opinions.  It  is  our  fault  and 
ours  only.  As  soon  as  we  have  learnt  and  re- 
solved to  buy  and  enjoy  only  what  is  worth 
having,  the  sellers  of  rubbish  may  put  up  their 
shutters  and  burn  their  wares. 

Capital,  then,  is  stored-up  work,  work  that 
has  been  paid  for  by  society.  Those  who  did 
the  work  and  took  its  reward,  turned  the  pro- 
ceeds of  it  into  making  something  more  instead 
of  into  pleasure  and  gratification  for  themselves. 
By  a  striking  metaphor  capital  is  often  described 
as  the  seed  corn  of  industry.  Seed  corn  is  the 
grain  that  the  farmer,  instead  of  making  it  into 
bread  for  his  own  table,  or  selling  it  to  turn  it 
into  picture-palace  tickets,  or  beer,  or  other 
forms  of  short-lived  comfort,  keeps  to  sow  in 
the  earth  so  that  he  may  reap  his  harvest  next 
year.  If  the  whole  world's  crop  were  eaten, 


1 8  Capital  and  Its  Reward 

there  would  be  no  seed  corn  and  no  harvest. 
So  it  is  with  industry.  If  its  whole  product 
were  turned  into  goods  for  immediate  consump- 
tion, there  could  be  no  further  development  of 
industry,  and  no  maintenance  of  its  existing 
plant,  which  would  soon  wear  out  and  perish. 
The  man  who  spends  less  than  he  earns  and 
puts  his  margin  into  industry,  keeps  industry 
alive. 

From  the  point  of  view  of  the  worker — by 
whom  I  mean  the  man  who  has  little  or  no 
capital  of  his  own,  and  has  only,  or  chiefly,  his 
skill,  of  head  or  of  hand,  to  earn  his  living  with 
— those  who  are  prepared  to  save  and  put  capital 
at  the  disposal  of  industry  ought  to  be  given 
every  possible  encouragement  to  do  so.  For 
since  capital  is  essential  to  industry,  all  those 
who  want  to  earn  a  living  in  the  workshops 
or  in  the  countinghouse,  or  in  the  manager's 
office,  will  most  of  all,  if  they  are  well  advised, 
want  to  see  as  much  capital  saved  as  possible. 
The  more  there  is  of  it,  the  more  demand  there 
will  be  for  the  brains  and  muscles  of  the  workers, 
and  the  better  the  bargain  these  latter  will  be 
able  to  make  for  the  use  of  their  brains  and 


Savers  and  Workers  19 

muscles.  If  capital  is  so  scarce  and  timid  that 
it  can  be  tempted  only  by  the  offer  of  high  rates 
for  its  use,  organizers  of  industry  will  think 
twice  about  expanding  works  or  opening  new 
ones,  and  there  will  be  a  check  to  the  demand 
for  workers.  If  so  many  people  are  saving 
that  capital  is  a  drug  in  the  market,  anyone 
who  has  an  enterprise  in  his  head  will  put  it  in 
hand,  and  workers  will  be  wanted,  first  for 
construction  then  for  operation. 

It  is  to  the  interest  of  workers  that  there 
should  be  as  many  capitalists  as  possible  offer- 
ing as  much  capital  as  possible  to  industry,  so 
that  industry  shall  be  in  a  state  of  chronic  glut 
of  capital  and  scarcity  of  workers.  Roughly, 
it  is  true  that  the  product  of  industry  is  divided 
between  the  workers  who  carry  it  on,  and  the 
savers  who,  out  of  the  product  of  past  work, 
have  built  the  workshop,  put  in  the  plant,  and 
advanced  the  money  to  pay  the  workers  until 
the  new  product  is  marketed.  The  workers 
and  the  savers  are  at  once  partners  and  rivals. 
They  are  partners  because  one  cannot  do  with- 
out the  other;  rivals  because  they  compete 
continually  concerning  their  share  of  the  profit 


20  Capital  and  Its  Reward 

realized.  If  the  workers  are  to  succeed  in  this 
competition  and  secure  for  themselves  an  ever 
increasing  share  of  the  profit  of  industry — and 
from  the  point  of  view  of  humanity,  civiliza- 
tion, nationality,  and  common  sense  it  is  most 
desirable  that  this  should  be  so — then  this  is 
most  likely  to  happen  if  the  savers  are  so  numer- 
ous that  they  will  be  weak  in  bargaining  and 
unable  to  stand  out  against  the  demands  of  the 
workers.  If  there  were  innumerable  millions 
of  workers  and  only  one  saver  with  money 
enough  to  start  one  factory,  the  one  saver  would 
be  able  to  name  his  own  terms  in  arranging  his 
wages  bill,  and  the  salaries  of  his  managers  and 
clerks.  If  the  wind  were  on  the  other  cheek, 
and  a  crowd  of  capitalists  with  countless  mil- 
lions of  money  were  eager  to  set  the  wheels  of 
industry  going,  and  could  not  find  enough 
workers  to  man  and  organize  and  manage  their 
workshops,  then  the  workers  would  have  the 
whip  hand.  To  bring  this  state  of  things  about 
it  would  seem  to  be  good  policy  not  to  damn  the 
capitalist  with  bell  and  with  book  and  frighten 
him  till  he  is  so  scarce  that  he  is  master  of  the 
situation,  but  to  give  him  every  encouragement 


Saving  and  the  State  21 

to  save  his  money  and  put  it  into  industry. 
For  the  more  plentiful  he  is,  the  stronger  is  the 
position  of  the  workers. 

In  fact  the  saver  is  so  essential  that  it  is 
nowadays  fashionable  to  contend  that  the  saving 
business  ought  not  to  be  left  to  the  whims  of 
private  individuals,  but  should  be  carried  out 
by  the  State  in  the  public  interest;  and  there 
are  some  innocent  folk  who  imagine  that,  if 
this  were  done,  the  fee  that  is  now  paid  to  the 
saver  for  the  use  of  the  capital  that  he  has  saved, 
would  somehow  or  other  be  avoided.  In  fact 
the  Government  would  have  to  tax  the  commu- 
nity to  produce  the  capital  required.  Capital 
would  be  still,  as  before,  the  proceeds  of  work 
done.  And  the  result  would  be  that  the  tax- 
payers as  a  whole  would  have  to  pay  for  capital 
by  providing  it.  This  might  be  a  more  equit- 
able arrangement,  but  as  capital  can  be  pro- 
duced only  by  work,  the  taxpayers  would  have  to 
do  a  certain  amount  of  work  with  the  prospect 
of  not  being  allowed  to  keep  the  proceeds,  but 
of  being  forced  to  hand  it  over  to  Government. 
Whether  such  a  plan  would  be  likely  to  be  effect- 
ive in  keeping  industry  supplied  with  capital 


22  Capital  and  Its  Reward 

is  a  question  which  need  not  be  debated  until 
the  possibility  of  such  a  system  becomes  a 
matter  of  practical  politics. 

For  our  present  purpose  it  is  enough  to  have 
shown  that  the  capital,  which  is  the  stock-in- 
trade  of  finance,  is  not  a  fraudulent  claim  to 
take  toll  of  the  product  of  industry,  but  an 
essential  part  of  the  foundation  on  which  in- 
dustry is  built.  A  man  can  become  a  capi- 
talist only  by  rendering  services  for  which  he 
receives  payment,  and  spending  part  of  his  pay 
not  on  his  immediate  enjoyment,  but  in  estab- 
lishing industry  either  on  his  own  account  or 
through  the  agency  of  someone  else  to  whom  he 
lends  the  necessary  capital.  Before  any  in- 
dustry can  start  there  must  be  tools  and  a  fund 
out  of  which  the  workers  can  be  paid  until  the 
work  that  they  do  begins  to  bring  in  its  returns. 
The  fund  to  buy  these  tools  and  pay  the  workers 
can  be  found  only  out  of  the  proceeds  of  work 
done  or  services  rendered.  Moreover,  there  is 
always  a  risk  to  be  run.  As  soon  as  the  primitive 
savage  left  off  making  everything  for  himself, 
and  took  to  doing  some  special  work,  such  as 
arrow  making,  in  the  hope  that  his  skill,  got 


The  Risk  of  Industry  23 

from  concentration  on  one  particular  employ- 
ment, would  be  rewarded  by  the  rest  of  the 
tribe  who  took  his  arrows  and  gave  him  food 
and  clothes  in  return,  he  began  to  run  the  risk 
that  his  customers  might  not  want  his  product, 
if  they  happened  to  take  to  fishing  for  their 
food  instead  of  shooting  it.  This  risk  is  still 
present  with  the  organizers  of  industry  and  it 
falls  first  on  the  capitalist.  If  an  industry  fails 
the  workers  cease  to  be  employed  by  it;  but  as 
long  as  they  work  for  it  their  wages  are  a  first 
charge  which  has  to  be  paid  before  capital  gets 
a  cent  of  interest  or  profit,  and  if  the  failure 
of  the  industry  is  complete  the  capital  sunk  in 
it  will  be  gone. 


CHAPTER  II 

BANKING   MACHINERY 

CAPITAL,  then,  is  work  that  has  been  stored  up 
and  invested  in  industry,  finance  is  the  machin- 
ery by  which  this  process  of  investment  is  carried 
out,  and  international  finance  is  the  machinery 
by  which  the  wealth  of  one  country  is  invested 
in  another. 

England  is  the  country  which  has,  until  the 
present  war  turned  everything  upside  down, 
been  most  active  in  the  international  money- 
lending  business;  and  so  we  shall  best  see  how 
this  business  is  worked  by  examining  its  machin- 
ery in  England. 

Let  us  consider  the  case  of  a  doctor  in  an 
English  country  town  who  is  making  an  annual 
income  of  about  £800  a  year,  living  on  £600 
of  it  and  saving  £200.  Instead  of  spending 

this  quarter  of  his  income  on  immediate  enjoy- 

24 


World-Wide  Investment  25 

ments,  such  as  wine  and  cigars,  and  journeys 
to  London,  he  invests  it  in  different  parts  of 
the  world  through  the  mechanism  of  interna- 
tional finance,  because  he  has  been  attracted 
by  the  advantages  of  a  system  of  investment 
which  was  fashionable  some  years  ago,  which 
worked  by  what  was  called  Geographical  Distri- 
bution.* This  meant  to  say  that  the  investors 
who  practised  it  put  their  money  into  as  many 
different  countries  as  possible,  so  that  the  risk 
of  loss  owing  to  climatic  or  other  disturbances 
might  be  spread  as  widely  as  possible.  So  here 
we  have  this  quiet  country  doctor  spreading  all 
over  the  world  the  money  that  he  gets  for  dosing 
and  poulticing  and  dieting  his  patients,  stimu- 
lating industry  in  many  climates  and  bringing 
some  part  of  its  proceeds  to  be  added  to  his 
store.  Let  us  see  how  the  process  works.  First 
of  all  he  has  a  bank,  into  which  he  pays  day  by 
day  the  fees  that  he  receives .  in  coin  or  notes 

*  All  this  imaginary  picture  is  of  events  before  the  war.  At 
present  Dr.  Pillman,  being  a  patriotic  citizen,  is  saving  much  faster 
than  before,  and  putting  every  pound  that  he  can  save  into  the 
hands  of  the  British  Government  by  subscribing  to  War  Loans 
and  buying  Exchequer  bonds.  He  is  too  old  to  go  and  do  medical 
work  at  the  front,  so  he  does  the  next  best  thing  by  cutting  down 
his  expenses  and  finding  money  for  the  war. 


26  Banking  Machinery 

and  the  cheques  that  he  gets,  each  half  year, 
from  those  of  his  patients  who  have  an  account 
with  him.  His  bank  is  one  of  the  country 
branches  of  a  great  banking  company  with  its 
head-office  in  London.  As  long  as  his  money  is 
in  the  bank,  the  bank  has  the  use  of  it,  and  not 
much  of  it  is  likely  to  go  abroad.  For  the 
English  banks  use  most  of  the  funds  entrusted 
to  them  in  investments  in  home  securities,  or 
in  loans  and  advances  to  home  customers. 
Part  of  them  they  use  in  buying  bills  of  exchange 
drawn  on  London  houses  by  merchants  and 
financiers  all  over  the  world,  so  that  even  when 
he  pays  money  into  his  bank  it  is  possible  that 
our  doctor  is  already  forming  part  of  the  machin- 
ery of  International  Finance  and  involving  us 
in  the  need  for  an  explanation  of  one  of  its 
mysteries. 

A  bill  of  exchange  is  an  order  to  pay.  When 
a  merchant  in  Argentina  sells  wheat  to  an  Eng- 
lish buyer,  he  draws  a  bill  on  the  buyer  (or 
some  bank  or  firm  in  England  whom  the  buyer 
instructs  him  to  draw  on),  saying,  "Pay  to 
me"  (or  anybody  else  whom  he  may  name) 
"the  sum  of  so  many  pounds."  This  bill,  if  it 


Bills  of  Exchange  27 

is  drawn  on  a  firm  or  company  of  well-known 
standing,  the  seller  of  the  wheat  can  immedi- 
ately dispose  of,  and  so  has  got  payment  for  his 
goods.  Usually  the  bill  is  made  payable  two 
or  three,  or  sometimes  six  months  after  sight, 
that  is  after  it  has  been  received  by  the  firm 
on  which  it  is  drawn,  and  "accepted"  by  it, 
that  is  signed  across  the  front  to  show  that  the 
firm  drawn  on  will  pay  the  bill  when  it  falls 
due.  These  bills  of  exchange,  when  thus  ac- 
cepted, are  promises  to  pay  entered  into  by 
firms  of  first-rate  standing,  and  are  held  as 
investments  by  English  banks.  Bills  of  ex- 
change are  also  drawn  on  English  houses  to 
finance  trade  transactions  between  foreign  coun- 
tries, and  also  as  a  means  of  borrowing  money 
from  England.  When  they  are  drawn  on  be- 
half of  English  customers,  the  credit  given  is 
given  at  home,  but  as  it  is  (almost  always)  given 
in  connection  with  international  trade,  the 
transaction  may  be  considered  as  part  of  inter- 
national finance.  When  they  are  drawn  on 
behalf  of  foreign  countries,  trading  with  other 
foreigners,  or  using  the  credit  to  lend  to  other 
foreigners,  the  connection  with  international 


28  Banking  Machinery 

finance  is  obvious.  They  are  readily  taken  all 
over  the  world,  because  all  over  the  world  there 
are  people  who  have  payments  to  make  to 
England  owing  to  the  wide  distribution  of 
English  trade,  and  it  has  long  been  England's 
boast  that  bills  of  exchange  drawn  on  London 
firms  are  the  currency  of  international  commerce 
and  finance. 

Some  people  say  that  this  commanding  posi- 
tion of  the  English  bill  in  the  world's  markets 
is  in  danger  of  being  lost  owing  to  the  present 
war:  in  the  first  place  because  America  is  gain- 
ing wealth  rapidly,  while  England  is  shooting 
away  her  savings,  and  also  because  the  Germans 
will  make  every  endeavour  to  free  themselves 
from  dependence  on  English  credit  for  the  con- 
duct of  their  trade.  Certainly  this  danger  is  a 
real  one,  but  it  does  not  follow  that  England 
will  not  be  able  to  meet  it.  If  the  war  teaches 
her  to  work  hard  and  consume  little,  so  that 
when  peace  comes  she  has  a  great  volume  of 
goods  to  export,  there  is  no  reason  why  the  bill 
on  London  should  not  retain  much  if  not  all  of 
its  old  prestige  and  supremacy  in  the  marts  of 
the  world.  For  we  must  always  remember 


Industry  and  Finance  29 

that  finance  is  only  the  handmaid  of  industry. 
She  is  often  a  pert  handmaid  who  steals  her 
mistress's  clothes  and  tries  to  flaunt  before  the 
world  as  the  mistress,  and  so  she  sometimes 
imposes  on  many  people  who  ought  to  know 
better,  who  think  that  finance  is  an  all-powerful 
influence.  Finance  is  a  mighty  influence,  but 
it  is  a  mere  piece  of  machinery  which  assists, 
quickens,  and  lives  on  production.  The  men 
who  make  and  grow  things,  and  carry  them 
from  the  place  where  they  are  made  and  grown 
to  the  place  where  they  are  wanted,  these  are 
the  men  who  furnish  the  raw  material  of  finance, 
without  which  it  would  have  to  shut  up  its  shop. 
If  they  and  their  work  ceased,  we  should 
all  starve,  and  the  financiers  would  have  nothing 
behind  the  pieces  of  paper  that  they  handle. 
If  finance  and  the  financiers  were  suddenly  to 
cease,  there  would  be  a  very  awkward  jar  and 
jolt  in  the  world's  commercial  machinery,  but  as 
long  as  the  stuff  and  the  means  of  carrying  it 
were  available,  we  should  very  soon  patch  up 
some  other  method  for  exchanging  it  between 
one  nation  and  another  and  one  citizen  and 
another.  The  supremacy  of  the  London  bill 


3O  Banking  Machinery 

of  exchange  was  created  only  to  a  small  extent 
by  any  supremacy  in  London's  financial  mechan- 
ism; it  was  based  chiefly  on  the  supremacy  of 
England's  world-wide  trade,  and  on  her  readi- 
ness to  take  goods  from  all  nations.  The 
consequence  of  this  was  that  traders  of  all 
nations  sold  goods  to  England  and  so  had  claims 
on  England  and  drew  bills  on  England,  and 
bought  goods  from  her,  and  so  owed  her  money 
and  wanted  to  buy  bills  drawn  on  her  to  pay 
their  debts  with.  So  everywhere  the  bill  on 
London  was  known  and  familiar  and  welcome. 
If  the  Americans  are  able  and  willing  to  develop 
such  a  world-wide  trade  as  England's,  then  the 
bill  on  New  York  will  have  a  vogue  all  over  the 
world  just  as  is  enjoyed  by  the  bill  on  London. 
Then  London  and  New  York  will  have  to  fight 
the  matter  out  by  seeing  which  will  provide  the 
best  and  cheapest  machinery  for  discounting 
the  bill,  that  is,  turning  it  into  cash  on  arrival, 
so  that  the  holder  of  it  shall  get  the  best  possible 
price,  at  the  present  moment,  for  a  bill  due  two 
or  three  months  hence. 

In   this   matter   of   machinery   London   has 
certain  advantages  which  ought,  if  well  used 


Notes  and  Cheques  31 

and  applied,  to  stand  her  in  good  stead  in  any 
struggle  that  lies  ahead  of  her.  London's 
credit  machinery  has  grown  up  in  almost  com- 
plete freedom  from  legislation,  and  it  has  con- 
sequently been  able  to  grow,  without  let  or 
hindrance,  along  the  lines  that  expediency  and 
convenience  have  shown  to  be  most  practical 
and  useful.  It  has  been  too  busy  to  be  logical 
or  theoretical,  and  consequently  it  is  full  of 
absurdities  and  anomalies,  but  it  works  with 
marvellous  ease  and  elasticity. 

In  its  centre  is  the  Bank  of  England,  with  the 
prestige  of  antiquity  and  of  official  dignity 
derived  from  acting  as  banker  to  the  British 
Government,  and  with  still  more  practical 
strength  derived  from  acting  as  banker  to  all 
the  other  great  banks,  several  of  them  much 
bigger,  in  certain  respects,  than  it.  The  Bank 
of  England  is  very  severely  and  strictly  re- 
stricted by  law  in  the  matter  of  its  note  issue, 
but  it  luckily  happened  when  Parliament  was 
imposing  these  restrictions  on  the  Bank's  busi- 
ness, that  note  issuing  was  already  becoming  a 
comparatively  unimportant  part  of  banking, 
owing  to  the  development  of  the  use  of  cheques. 


32  Banking  Machinery 

Nowadays,  when  borrowers  go  to  the  Bank  of 
England  for  loans,  they  do  not  want  to  take 
them  out  in  notes;  all  they  want  is  a  credit  in 
the  Bank's  books  against  which  they  can  draw 
cheques.  A  credit  in  the  Bank  of  England's 
books  is  regarded  by  the  financial  community 
as  "cash,"  and  this  pleasant  fiction  has  given 
the  Bank  the  power  of  creating  cash  by  a  stroke 
of  its  pen  and  to  any  extent  that  it  pleases,  sub- 
ject only  to  its  own  view  as  to  what  is  prudent 
and  sound  business.  On  p.  33  is  a  specimen  of 
a  return  that  is  published  each  week  by  the 
Bank  of  England,  showing  its  position  in  two 
separate  accounts  with  regard  to  its  note-issuing 
business  and  its  banking  business:  the  return 
taken  is  an  old  one,  published  before  the  war, 
so  as  to  show  how  the  machine  worked  in  normal 
times  before  war's  demands  had  blown  out 
the  balloon  of  credit  to  many  times  its  former 
size. 

If  the  commercial  and  financial  community 
is  short  of  cash,  all  that  it  has  to  do  is  to  go  to 
the  Bank  of  England  and  borrow  a  few  millions, 
and  the  only  effect  on  the  Bank's  position  is  an 
addition  of  so  many  millions  to  its  holding  of 


A  Bank  Return 


33 


•Orfoo" 

M    tO»O 

o  •*••«• 


<** 


cfvo" 
ON  ON 
>O  "5 


"1  ' 

J   '   '  a 

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i  i 

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2:ll  § 

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*H         H         C       ^ 

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s  P  1 

H        g  IH  w  ™ 

1-5             W             ^  J3r2     > 

§      H     OOOw 

3                  ^      fH    4_J    '^| 

H        O  tj3  O  O 
«       OO^O 

W        <5 

H 

§  a  . 

Q 

n             O         O  ^  ^  10  O 

to 

M    g    5          : 

O            55        O  oo  M  o  w 

*        H    *t  a  ^^  °- 

°°» 

Z        w       oo                      a 
3      m      Q                  (• 

S       fowoo  IOON 

5               «         IO  c*5  H<  00   <S 

M 

•-I         ON                         C 

N             ^!         IO  T^  CO  ^ 

oo 

«                   vo"                        vi 

"*            CO           "    fc    **    *" 

to 

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2  1111 

2 

MKAOw 

34  Banking  Machinery 

securities  and  a  similar  addition  to  its  deposits. 
It  may  sometimes  happen  that  the  borrowers 
may  require  the  use  of  actual  currency,  and  in 
that  case  part  of  the  advances  made  will  be 
taken  out  in  the  form  of  notes  and  gold,  but 
as  a  general  rule  the  Bank  is  able  to  perform 
its  function  of  providing  emergency  credit  by 
merely  making  entries  in  its  books. 

With  the  Bank  of  England  thus  acting  as 
a  centre  to  the  system,  there  has  grown  up 
around  it  a  circle  of  the  great  joint-stock  banks, 
which  provide  credit  and  currency  for  commerce 
and  finance  by  lending  money  and  taking  it  on 
deposit,  or  on  current  account.  These  banks 
work  under  practically  no  legal  restrictions  of 
any  kind  with  regard  to  the  amount  of  cash 
that  they  hold,  or  the  use  that  they  make  of  the 
money  that  is  entrusted  to  their  keeping.  They 
are  not  allowed,  if  they  have  an  office  in  London, 
to  issue  notes  at  all,  but  in  all  other  respects 
they  are  left  free  to  conduct  their  business  along 
the  lines  that  experience  has  shown  them  to  be 
most  profitable  to  themselves,  and  most  con- 
venient for  their  customers.  Being  joint-stock 
companies  they  have  to  publish  periodically, 


A  Bank  Balance  Sheet 


35 


for  the  information  of  their  shareholders,  a 
balance  sheet  showing  their  position.  Before 
the  war  most  of  them  published  a  monthly 
statement  of  their  position,  but  this  habit  has 
lately  been  given  up.  No  legal  regulations 
guide  them  in  the  form  or  extent  of  the  infor- 
mation that  they  give  in  their  balance  sheets, 
and  their  great  success  and  solidity  is  a  triumph 
of  unfettered  business  freedom.  This  absence 
of  restriction  gives  great  elasticity  and  adapt- 
ability to  the  credit  machinery  of  London. 
Here  is  a  specimen  of  one  of  their  balance  sheets, 
slightly  simplified,  and  dating  from  the  days 
before  the  war: 


LIABILITIES. 

Capital          (sub- 
scribed) . .     £14,000,000 


Paid  up 
Reserve 
Deposits 
Circular 

etc. 

Acceptances 
Profit  and  loss 


Notes 


3,500,000 

4,000,000 

87,000,000 

3,000,000 

6,000,000 

500,000 


£104,000,000 


ASSET 

Cash  in  hand  and 
at  Bank  of 
England 

Cash  at  call  and 
short  notice  . . 

Bills  discounted .  . 

Govt.  Securities 

Other  Invest- 

ments 

Advances  and 
loans 

Liability  of  cus- 
tomers on  ac- 
count of  Ac- 
ceptances 

Premises 


£12,500,000 

13,000,000 

19,000,000 

5,000,000 

4,500,000 
42,000,000 


6,000,000 
2,000,000 


£104,000,000 


36  Banking  Machinery 

On  one  side  are  the  sums  that  the  bank  has 
received,  in  the  shape  of  capital  subscribed, 
from  its  shareholders,  and  in  the  shape  of  de- 
posits from  its  customers,  including  Dr.  Pill- 
man  and  thousands  like  him;  on  the  other  the 
cash  that  it  holds,  in  coin,  notes,  and  credit  at 
the  Bank  of  England,  its  cash  lent  at  call  or 
short  notice  to  bill  brokers  (of  whom  more 
anon)  and  the  Stock  Exchange,  the  bills  of 
exchange  that  it  holds,  its  investments  in  British 
Government  and  other  stocks,  and  the  big  item 
of  loans  and  advances,  through  which  it  finances 
industry  and  commerce  at  home.  It  should 
be  noted  that  the  entry  on  the  left  side  of  the 
balance  sheet,  "Acceptances,"  refers  to  bills 
of  exchange  which  the  bank  has  accepted  for 
merchants  and  manufacturers  who  are  import- 
ing goods  and  raw  material,  and  have  instructed 
the  foreign  exporters  to  draw  bills  on  their 
bankers.  As  these  merchants  and  manufac- 
turers are  responsible  to  the  bank  for  meeting 
the  bills  when  they  fall  due,  the  acceptance 
item  is  balanced  by  an  exactly  equivalent  entry 
on  the  other  side,  showing  this  liability  of 
customers  as  an  asset  in  the  bank's  favour. 


Wheels  in  the  Machine  37 

This  business  of  acceptance  is  done  not  only 
by  the  great  banks,  but  also  by  a  number  of 
private  firms  with  connections  in  foreign  coun- 
tries, and  at  home,  through  which  they  place 
their  names  and  credit  at  the  disposal  of  people 
less  eminent  for  wealth  and  position,  who  pay 
them  a  commission  for  the  use  of  them. 

Other  wheels  in  London's  credit  machinery 
are  the  London  offices  of  colonial  and  foreign 
banks,  and  the  bill  brokers  or  discount  houses 
which  deal  in  bills  of  exchange  and  constitute 
the  discount  market.  Thus  we  see  that  there 
is  in  London  a  highly  specialized  and  elaborate 
machinery  for  making  and  dealing  in  these 
bills,  which  are  the  currency  of  international 
trade.  Let  us  recapitulate  the  history  of  the 
bill  and  see  the  part  contributed  to  its  career 
by  each  wheel  in  the  machine.  We  imagined 
a  bill  drawn  by  an  Argentine  seller  against  a 
cargo  of  wheat  shipped  to  an  English  merchant. 
The  bill  will  be  drawn  on  a  London  accepting 
house,  to  whom  the  English  merchant  is  liable 
for  its  due  payment.  The  Argentine  merchant, 
having  drawn  the  bill,  sells  it  to  the  Buenos 
Ayres  branch  of  a  South  American  bank, 


38  Banking  Machinery 

formed  with  English  capital,  and  having  its 
head  office  in  London.  It  is  shipped  to  London, 
to  the  head  office  of  the  South  American  bank, 
which  presents  it  for  acceptance  to  the  accepting 
house  on  which  it  is  drawn,  and  then  sells  it  to 
a  bill  broker  at  the  market  rate  of  discount. 
If  the  bill  is  due  three  months  after  sight,  and 
is  for  £2000,  and  the  market  rate  of  discount  is 
4  per  cent,  for  three  months'  bills,  the  present 
value  of  the  bill  is  obviously  £1980.  The  bill 
broker,  either  at  once  or  later,  probably  sells  the 
bill  to  a  bank,  which  holds  it  as  an  investment 
until  its  due  date,  by  which  time  the  importer, 
having  sold  the  wheat  at  a  profit,  pays  the 
money  required  to  meet  the  bill  to  his  banker 
and  the  transaction  is  closed.  Thus  by  means 
of  the  bill  the  exporter  has  received  immediate 
payment  for  his  wheat,  the  importing  merchant 
has  been  supplied  with  credit  for  three  months 
in  which  to  bring  home  his  profit,  and  the  bank 
which  bought  the  bill  has  provided  itself  with 
an  investment  such  as  bankers  love,  because  it 
has  to  be  met  within  a  short  period  by  a  house 
of  first-rate  standing. 

All  this  elaborate,  but  easily  working  ma- 


Credit  and  Trade  39 

chinery  has  grown  up  for  the  service  of  commerce. 
It  is  true  that  bills  of  exchange  are  often  drawn 
by  moneylenders  abroad  on  moneylenders  in 
England  merely  in  order  to  raise  credit,  that 
is  to  say,  to  borrow  money  by  means  of  the 
London  discount  market.  Sometimes  these 
credits  are  used  for  merely  speculative  purposes, 
but  in  the  great  majority  of  cases  they  are 
wanted  for  the  furtherance  of  production  in 
the  borrowing  country.  The  justification  of 
the  English  accepting  houses,  and  bill  brokers, 
and  banks  (in  so  far  as  they  engage  in  this  busi- 
ness), is  the  fact  that  they  are  assisting  trade, 
and  could  not  live  without  trade,  and  that  trade 
if  deprived  of  their  services  would  be  gravely 
inconvenienced  and  could  resume  its  present 
activity  only  by  making  a  new  machinery  more 
or  less  on  the  same  lines.  The  bill  whose  imag- 
inary history  has  been  traced,  came  into  being 
because  the  drawer  had  a  claim  on  England 
through  a  trade  transaction.  He  was  able  to 
sell  it  to  the  South  American  bank  only  because 
the  bank  knew  that  many  other  people  in 
Argentina  would  have  to  make  payments  to 
England  and  would  come  to  it  and  ask  it  for 


40  Banking  Machinery 

drafts  on  London,  which,  by  remitting  this  bill 
to  be  sold  in  London,  it  would  be  able  to  supply. 
International  finance  is  so  often  regarded  as  a 
machinery  by  which  paper  wealth  is  manu- 
factured out  of  nothing,  that  it  is  very  import- 
ant to  remember  that  all  this  paper  wealth  ac- 
quires value  only  by  being  ultimately  based  on 
something  that  is  grown  or  made  and  wanted 
to  keep  people  alive  or  comfortable,  or  at  least 
happy  in  the  belief  that  they  have  got  some- 
thing that  they  thought  they  wanted,  or  which 
habit  or  convention  obliged  them  to  possess. 
f  In  America  the  banking  system  grew  up  on 
lines  quite  different  to  those  followed  in  England. 
England  had  a  few  great  banks  with  branches 
all  over  the  country,  grouped  round  the  Bank 
of  England.  In  the  United  States  there  was  a 
much  greater  number  of  banks,  which  worked 
more  as  individuals  and  less  as  part  of  a  co- 
ordinated whole.  The  National  banks  were  not 
allowed  to  "accept"  bills  and  it  was  more  than 
likely  that  none  of  the  funds  deposited  in  most 
of  the  banks  of  the  United  States  would  be 
invested  in  international  business.  This  was 
partly  because,  owing  to  the  many  and  profit- 


American  Banking  System  41 

able  outlets  for  the  investment  of  money  in 
the  United  States,  there  was  no  need  for  its 
financiers  to  go  abroad  in  order  to  use  the  funds 
entrusted  to  them.  Their  chief  interest  in  the 
world  market  was  as  borrowers.  But  the  Euro- 
pean war  has  pushed  forward  the  day  on  which 
America  has  taken  its  place  as  lender  in  the 
international  money  market,  and  its  banking 
system  had,  in  the  very  nick  of  time,  been  re- 
organized in  such  a  way  that  it  is  ready  to  face 
the  problems  of  international  finance.  Under 
the  Federal  Reserve  system  American  banking 
is  now  grouped  and  co-ordinated  and  has  been 
furnished  with  powers  of  acceptance  and  re- 
discount. If  England  had  advantages  in  its 
slowly  evolved  system,  shaped  and  tested  by 
centuries  of  trial  and  strain,  America  has  been 
able  to  benefit  by  the  experience  and  mistakes 
of  older  nations,  and  to  fashion  a  banking  system 
after  careful  study  of  all  that  was  best  and  worst 
abroad.  The  new  system  came  into  being  at 
a  time  of  stress,  and  so  far  has  faced  with  admir- 
able composure  and  success  a  series  of  problems 
for  which  no  experience  could  have  prepared  it. 
America  is  now  one  of  the  leading  powers  in 


42  Banking  Machinery 

international  finance,  and  on  the  wise  and  skil- 
ful use  of  its  strength  the  future  prosperity 
of  the  civilized  world  will,  to  a  great  extent, 
depend. 


CHAPTER  III 

INVESTMENTS   AND   SECURITIES 

So  far  we  have  considered  only  what  happens 
to  the  money  of  those  who  save  as  long  as  it 
is  left  in  the  hands  of  their  bankers,  and  we 
have  seen  that  it  is  likely  to  be  employed  inter- 
nationally, only  if  invested  by  bankers  in  bills 
of  exchange  drawn  to  finance  foreign  trade  or 
foreign  operations.  It  is  true  that  bankers 
also  invest  money  in  securities,  and  that  some 
of  these  are  foreign,  but  here  again  the  pro- 
portion invested  abroad  is  so  small  that  we  may 
be  reasonably  sure  that  any  money  left  by  us 
in  the  hands  of  our  bankers  will  be  employed 
at  home. 

But  in  actual  practice  those  who  save  do  not 
pile  up  a  large  balance  at  their  banks.  The 
ordinary  private  investor,  when  he  has  got  a 
balance  at  his  bank  big  enough  to  make  him 

43 


44  Investments  and  Securities 

feel  comfortable  about  being  able  to  meet  all 
probable  outgoings,  puts  any  money  that  he 
may  have  to  spare  into  some  security  dealt  in 
on  the  Stock  Exchange,  and  so  securities  and 
the  Stock  Exchange  have  to  be  described  and 
examined  next.  They  are  very  much  to  the 
point,  because  it  is  through  them  that  inter- 
national finance  has  done  most  of  its  work. 

Securities,  then,  are  the  stocks,  shares,  and 
bonds  which  are  given  to  those  who  put  money 
into  companies,  or  into  loans  issued  by  Govern- 
ments, municipalities,  and  other  public  bodies. 
Let  us  take  the  Governments  and  public  bodies 
first,  because  the  securities  issued  by  them  are 
in  some  ways  simpler  than  those  created  by 
companies. 

When  a  Government  wants  to  borrow,  it 
does  so  because  it  needs  money.  The  purpose 
for  which  it  needs  it  may  be  to  build  a  railway 
or  canal,  or  make  a  harbour,  or  carry  out  a 
land  improvement  or  irrigation  scheme,  or 
otherwise  work  some  enterprise  by  which  the 
power  of  the  country  to  grow  and  make  things 
may  be  increased.  Enterprises  of  this  kind 
are  usually  called  reproductive,  and  in  many 


Government  Loans  45 

cases  the  actual  return  from  them  in  cash  more 
than  suffices  to  meet  the  interest  on  the  debt 
raised  to  carry  them  out,  to  say  nothing  of  the 
direct  benefit  to  the  country  in  increasing  its 
output  of  wealth.  In  England  the  Government 
has  practically  no  debt  that  is  represented  by 
reproductive  assets.  Its  Government  has  left 
the  development  of  the  country's  resources  to 
private  enterprise,  and  the  only  assets  from 
which  it  derives  a  revenue  are  the  Post  Office 
buildings,  the  Crown  lands,  and  some  shares  in 
the  Suez  Canal  which  were  bought  for  a  political 
purpose.  Governments  also  borrow  money  be- 
cause their  revenue  from  taxes  is  less  than  the 
sums  that  they  are  spending.  This  happens 
most  often  and  most  markedly  when  they  are 
carrying  on  war,  or  when  nations  are  engaged 
in  a  competition  in  armaments,  building  navies 
or  raising  armies  against  one  another  so  as  to 
be  ready  for  war  if  it  happens.  This  kind  of 
debt  is  called  dead-weight  debt,  because  there 
is  no  direct  or  indirect  increase,  in  consequence 
of  it,  in  the  country's  power  to  produce  things 
that  are  wanted.  This  kind  of  borrowing  is 
generally  excused  on  the  ground  that  provision 


46  Investments  and  Securities 

for  the  national  safety  is  a  matter  which  concerns 
posterity  quite  as  much  as  the  present  generation, 
and  that  it  is,  therefore,  fair  to  leave  posterity 
to  pay  part  of  the  bill. 

Municipalities  likewise  borrow  both  for  re- 
productive purposes  and  for  objects  from  which 
no  direct  revenue  can  be  expected.  They  may 
invest  money  lent  them  in  gas  or  electric  works 
or  water  supply  or  tramways,  and  get  an  in- 
come from  them  which  will  more  than  pay  the 
interest  on  the  money  borrowed.  Or  they  may 
put  it  into  public  parks  and  recreation  grounds 
or  municipal  buildings,  or  improvements  in 
sanitation,  thereby  beautifying  and  cleansing 
the  town.  If  they  do  these  things  in  such  a 
way  as  to  make  the  town  a  pleasanter  and 
healthier  place  to  live  in,  they  may  indirectly 
increase  their  revenue;  but  if  they  do  them 
extravagantly  and  badly,  they  run  the  risk  of 
putting  a  burden  on  the  ratepayers  that  will 
make  people  shy  of  living  within  their  borders. 

Whatever  be  the  object  for  which  the  loan 
is  issued,  the  procedure  is  the  same  by  which 
the  money  is  raised.  Here  again,  since  England 
has  hitherto  been  the  greatest  international 


Municipal  Borrowing  47 

moneylender,  the  system  by  which  she  has 
worked  the  business  may  well  be  described: 
The  Government  or  municipality  invites  sub- 
scriptions in  London  through  a  bank  or  through 
some  great  financial  house,  which  publishes 
what  is  called  a  prospectus  by  circular,  and  in 
the  papers,  giving  the  terms  and  details  of  the 
loan.  People  who  have  money  to  spare,  or 
are  able  to  borrow  money  from  their  bankers, 
and  are  attracted  by  the  terms  of  the  loan,  sign 
an  application  form  which  is  issued  with  the 
prospectus,  and  send  a  cheque  for  the  sum, 
usually  5  per  cent,  of  the  amount  that  they 
apply  for,  which  is  payable  on  application.  If 
the  loan  is  over-subscribed,  the  applicants  will 
receive  only  part  of  the  sums  for  which  they 
apply.  If  it  is  not  fully  subscribed,  they  will 
get  all  that  they  have  asked  for,  and  the  balance 
left  over  will  be  taken  up  in  most  cases  by  a 
syndicate  formed  by  the  bank  or  firm  that 
issued  the  loan,  to  "underwrite"  it.  Under- 
writing means  guaranteeing  the  success  of  a 
loan,  and  those  who  do  so  receive  a  commission 
of  anything  from  I  to  3  per  cent. ;  if  the  loan  is 
popular  and  goes  well  the  underwriters  take 


48  Investments  and  Securities 

their  commission  and  are  quit;  if  the  loan  is 
what  the  financial  district  genially  describes 
as  a  "frost,"  the  underwriters  may  find  them- 
selves saddled  with  the  greater  part  of  it,  and 
will  have  the  pleasure  of  nursing  it  until  such 
time  as  the  investing  public  will  take  it  off  their 
hands.  Underwriting  is  thus  a  profitable  busi- 
ness when  times  are  good,  and  the  public  is 
feeding  freely,  but  it  can  be  indulged  in  only 
by  folk  with  plenty  of  capital  or  credit,  and  so 
able  to  carry  large  blocks  of  stock  if  they  find 
themselves  left  with  them. 

To  take  a  practical  example,  let  us  suppose 
that  the  King  of  Ruritania  is  informed  by  his 
Minister  of  Marine  that  a  battleship  must  at 
once  be  added  to  his  fleet  because  his  next-door 
neighbour  is  thought  to  be  thinking  of  making 
himself  stronger  on  the  water,  while  his  Minister 
of  Finance  protests  that  it  is  impossible,  with- 
out the  risk  of  serious  trouble,  to  add  anything 
further  to  the  burdens  of  the  taxpayers.  A 
loan  is  the  easy  and  obvious  way  out.  London 
and  Paris  between  them  will  find  two  or  three 
millions  with  pleasure.  That  will  be  enough 
for  a  battleship  and  something  over  in  the  way 


Floating  a  Loan  49 

of  new  artillery  for  the  army  which  can  be 
ordered  in  France  so  as  to  secure  the  consent  of 
the  French  Government,  which  was  wont  to 
insist  that  a  certain  proportion  of  any  loan 
raised  in  Paris  must  be  spent  in  the  country. 
(It  need  hardly  be  said  that  all  these  events 
are  supposed  to  be  happening  in  the  years  before 
the  war.)  Negotiations  are  entered  into  with 
a  group  of  French  banks  and  an  English  issuing 
house.  The  French  banks  take  over  their 
share,  and  sell  it  to  their  customers  who  are, 
or  were,  in  the  habit  of  following  the  lead  of 
their  bankers  in  investment  with  a  blind  con- 
fidence, that  gave  the  French  banks  enormous 
power  in  the  international  money  market.  The 
English  issuing  house  sends '  round  a  stock- 
broker to  underwrite  the  loan.  If  the  issuing 
house  is  one  that  is  usually  successful  in  its 
issues,  the  privilege  of  underwriting  anything 
that  it  brings  out  is  eagerly  sought  for.  Banks, 
financial  firms,  insurance  companies,  trust  com- 
panies, and  stockbrokers  with  big  investment 
connections  will  take  as  much  underwriting  as 
they  are  offered,  in  many  cases  without  making 
very  searching  inquiry  into  the  terms  of  the 


50  Investments  and  Securities 

security  offered.  The  name  of  the  issuing 
house  and  the  amount  of  the  underwriting  com- 
mission— which  we  will  suppose  in  this  case  to 
be  2  per  cent. — are  enough  for  them.  They  know 
that  if  they  refuse  any  chance  of  underwriting 
that  is  offered,  they  are  not  likely  to  get  one 
when  the  next  loan  comes  out,  and  since  under- 
writing is  a  profitable  business  for  those  who 
can  afford  to  run  its  risks,  many  firms  put  their 
names  down  for  anything  that  is  put  before  them, 
as  long  as  they  have  confidence  in  the  firm 
that  is  handling  the  loan.  This  power  in  the 
hands  of  the  big  issuing  houses,  to  get  any  loan 
that  they  choose  to  father  underwritten  in  a 
few  hours  by  a  crowd  of  eager  followers,  gives 
them,  of  course,  enormous  strength  and  lays 
a  heavy  responsibility  on  them.  They  only 
preserve  it  by  being  careful  in  the  use  of  it, 
and  exercising  great  discrimination  in  the  class 
of  securities  that  they  handle. 

While  the  underwriting  is  going  on  the  pros- 
pectus is  being  prepared  by  which  the  subscrip- 
tions of  the  public  are  invited,  and  in  the 
meantime  it  will  probably  happen  that  the  news- 
papers have  had  a  hint  that  a  Ruritanian  loan  is 


The  Prospectus  51 

on  the  anvil,  so  that  preliminary  paragraphs  may 
prepare  an  atmosphere  of  expectancy.  News 
of  a  forthcoming  new  issue  is  always  a  welcome 
item  in  the  dull  routine  of  a  newspaper  money 
column,  and  the  journalists  are  only  serving 
their  public  and  their  papers  in  being  eager  to 
chronicle  it.  Lurid  stories  are  still  handed 
down  by  tradition  in  London  of  how  great 
financial  journalists  acquired  fortunes  in  days 
gone  by,  by  being  allotted  blocks  of  new  loans 
so  that  they  might  expand  on  their  merits  and 
then  sell  them  at  a  big  profit  when  they  had 
created  a  public  demand  for  them.  There 
seems  to  be  no  doubt  that  this  kind  of  thing 
used  to  happen  in  the  dark  ages  when  finance 
and  financial  journalism  did  a  good  deal  of 
dirty  business  between  them.  Now,  the  money 
columns  of  the  great  London  papers  have  for  a 
very  long  time  been  free  from  any  taint  of  this 
kind,  and  on  the  whole  it  may  be  said  that 
finance  in  England  is  a  very  much  cleaner  affair 
than  either  law  or  politics.  It  is  true  that 
swindles  still  happen  in  finance,  but  their  num- 
ber is  trivial  compared  with  the  volume  of  the 
public's  money  that  is  handled  and  invested. 


52  Investments  and  Securities 

It  is  only  in  the  by-ways  of  finance  and  in  the 
gutters  of  its  journalism  that  the  traps  are 
laid  for  the  greedy  and  gullible  public,  and  if 
the  public  walks  in,  it  has  itself  to  blame.  A 
genuine  investor  who  wants  security  and  a 
safe  return  on  his  money  can  always  get  it. 
Unfortunately  the  investor  is  almost  always 
at  the  same  time  a  speculator,  and  is  apt  to 
forget  the  distinction;  and  those  who  ask  for 
a  high  rate  of  interest,  absolute  safety,  and  a 
big  rise  in  the  prices  of  securities  that  they  buy 
are  only  inviting  disaster  by  the  greed  that 
wants  the  unattainable  and  the  gullibility  that 
deludes  them  into  thinking  they  can  have  it. 

To  return  to  our  Ruritanian  loan,  which  we 
left  being  underwritten.  The  prospectus  duly 
comes  out  and  is  advertised  in  the  papers  and 
sown  broadcast  over  the  country  through  the 
post.  It  offers  £1,500,000  (part  of  £3,000,000 
of  which  half  is  reserved  for  issue  in  Paris), 
4^  per  cent,  bonds  of  the  Kingdom  of  Ruritania, 
with  interest  payable  on  April  ist  and  October 
1st,  redeemable  by  a  cumulative  Sinking  Fund 
of  I  per  cent.,  operating  by  annual  drawings 
at  par,  the  price  of  issue  being  97,  payable  as 


The  Prospectus  53 

to  5  per  cent,  on  application,  15  per  cent,  on 
allotment,  and  the  balance  in  instalments  ex- 
tending over  four  months.  Coupons  and  drawn 
bonds  are  payable  in  sterling  at  the  counting- 
house  of  the  issuing  firm.  The  extent  of  the 
other  information  given  varies  considerably. 
Some  firms  rely  so  far  on  their  own  prestige 
and  the  credit  of  those  on  whose  account  they 
offer  loans,  that  they  state  little  more  than  the 
bare  terms  of  the  issue  as  given  above.  Others 
deign  to  give  details  concerning  the  financial 
position  of  the  borrowing  Government,  such 
as  its  revenue  and  expenditure  for  a  term  of 
years,  the  amount  of  its  outstanding  debt,  and 
of  its  assets  if  any.  If  the  credit  of  the  King- 
dom of  Ruritania  is  good,  such  a  loan  as  here 
described  would  be,  or  would  have  been  before 
the  war,  an  attractive  issue,  since  the  investor 
would  get  a  good  rate  of  interest  for  his  money, 
and  would  be  certain  of  getting  par  or  £100, 
some  day,  for  each  bond  for  which  he  now  pays 
£97.  This  is  ensured  by  the  action  of  the  Sink- 
ing Fund  of  i  per  cent,  cumulative,  which 
works  as  follows.  Each  year,  as  long  as  the 
loan  is  outstanding,  the  Kingdom  of  Ruritania 


54  Investments  and  Securities 

will  have  to  put  £165,000  in  the  hands  of  the 
issuing  houses,  to  be  applied  to  interest  and 
Sinking  Fund.  In  the  first  year  interest  at 
4>2  per  cent,  will  take  £135,000  and  Sinking 
Fund  (i  per  cent,  of  £3,000,000)  £30,000;  this 
£30,000  will  be  applied  to  the  redemption  of 
bonds  to  that  value,  which  are  drawn  by  lot; 
so  that  next  year  the  interest  charge  will  be  less 
and  the  amount  available  for  Sinking  Fund  will 
be  greater;  and  each  year  the  comfortable  effect 
of  this  process  continues,  until  at  last  the  whole 
loan  is  redeemed  and  every  investor  will  have 
got  his  money  back  and  something  over.  The 
effect  of  this  obligation  to  redeem,  of  course, 
makes  the  market  in  the  loan  very  steady,  be- 
cause the  chance  of  being  drawn  at  par  in  any 
year,  and  the  certainty  of  being  drawn  if  the 
investor  holds  it  long  enough,  ensures  that  the 
market  price  will  be  strengthened  by  this 
consideration. 

Such  being  the  terms  of  the  loan  we  may  be 
justified  in  supposing — if  Ruritania  has  a  clean 
record  in  its  treatment  of  its  creditors,  and  if 
the  issuing  firm  is  one  that  can  be  relied  on  to 
do  all  that  can  be  done  to  safeguard  their  inter- 


Underwriters'  Risk  55 

ests — that  the  loan  is  a  complete  success  and 
is  fully  subscribed  for  by  the  public.  The 
underwriters  will  consequently  be  relieved  of 
all  liability  and  will  pocket  their  2  per  cent., 
which  they  have  earned  by  guaranteeing  the 
success  of  the  issue.  If  some  financial  or  po- 
litical shock  had  occurred  which  made  investors 
reluctant  to  put  money  into  anything  at  the 
time  when  the  prospectus  appeared  or  suggested 
the  likelihood  that  Ruritania  might  be  involved 
in  war,  then  the  underwriters  would  have  had 
to  take  up  the  greater  part  of  the  loan  and  pay 
for  it  out  of  their  own  pockets;  and  this  is  the 
risk  for  which  they  are  given  their  commission. 
Ruritania  will  have  got  its  money  less  the  cost 
of  underwriting,  advertising,  commissions,  I 
per  cent,  stamp  payable  to  the  British  Govern- 
ment, and  the  profit  of  the  issuing  firm.  Some 
shipyard  in  an  industrial  centre  will  lay  down 
a  battleship  and  English  shareholders  and  work- 
men will  benefit  by  the  contract,  and  the  invest- 
ors will  have  got  well  secured  bonds  paying 
them  a  good  rate  of  interest  and  likely  to  be 
easily  salable  in  the  market  if  the  holders 
want  to  turn  them  into  cash.  The  bonds  will 


56  Investments  and  Securities 

be  large  pieces  of  paper  stating  that  they  are 
4>£  per  cent,  bonds  of  the  Kingdom  of  Ruritania 
for  £20,  £100,  £500,  or  £1000  as  the  case  may 
be,  and  they  will  each  have  a  sheet  of  coupons 
attached,  that  is,  small  pieces  to  be  cut  off  and 
presented  at  the  date  of  each  interest  payment ; 
each  one  states  the  amount  due  each  half  year 
and  the  date  when  it  will  have  to  be  met. 

Bonds  are  called  bearer  securities,  that  is  to 
say,  possession  of  them  entitles  the  bearer 
to  receive  payment  of  them  when  drawn  and 
to  collect  the  coupons  at  their  several  dates. 
They  are  the  usual  form  for  the  debts  of  foreign 
Governments  and  municipalities,  and  of  foreign 
railway  and  industrial  companies. 

In  England,  they  chiefly  affect  what  are  called 
registered  and  inscribed  stocks — that  is,  if  the 
Government  or  one  of  the  British  municipalities 
issues  a  loan,  the  subscribers  have  their  names 
registered  in  a  book  by  the  debtor,  or  its  banker, 
and  merely  hold  a  certificate  which  is  a  receipt, 
but  the  possession  of  which  is  not  in  itself  evi- 
dence of  ownership.  There  are  no  coupons,  and 
the  half-yearly  interest  is  posted  to  stockholders, 
or  to  their  bankers,  or  to  any  one  else  to  whom 


Registered  Stocks  57 

they  may  direct  it  to  be  sent.  Consequently 
when  the  holder  sells  it  is  not  enough  for  him 
to  hand  over  his  certificate,  as  is  the  case  with 
a  bearer  security,  but  the  stock  has  to  be  trans- 
ferred into  the  name  of  the  buyer  in  the  register 
kept  by  the  debtor,  or  by  the  bank  which 
manages  the  business  for  it. 

When  the  securities  offered  are  not  loans  by 
public  bodies,  but  represent  an  interest  in  a 
company  formed  to  build  a  railway  or  carry 
on  any  industrial  or  agricultural  or  mining 
enterprise,  the  procedure  will  be  on  the  same 
lines,  except  that  the  whole  affair  will  be  on  a 
less  exalted  plane.  Such  an  issue  would  not, 
save  in  exceptional  circumstances,  as  when  a 
great  railway  is  offering  bonds  or  debenture 
stock,  be  fathered  by  one  of  the  leading  financial 
firms.  Industrial  ventures  are  associated  with 
so  many  risks  that  they  are  usually,  in  England, 
left  to  the  smaller  fry,  and  those  who  under- 
write them  expect  higher  rates  of  commission, 
while  subscribers  can  only  be  tempted  by  antici- 
pations of  more  mouth-filling  rates  of  interest 
or  profit. 

This  distinction  between  interest  and  profit 


58  Investments  and  Securities 

brings  us  to  a  further  difference  between  the 
securities  of  companies  and  public  bodies.  Pub- 
lic bodies  do  not  offer  profit,  but  interest,  and 
the  distinction  is  very  important.  A  Govern- 
ment asks  for  your  money  and  promises  to  pay 
a  rate  for  it,  whether  the  object  on  which  the 
money  is  spent  be  profit-earning  or  no,  and,  if 
it  is,  whether  a  profit  be  earned  or  no.  A  com- 
pany asks  subscribers  to  buy  it  up  and  become 
owners  of  it,  taking  its  profits,  that  it  expects 
to  earn,  and  getting  no  return  at  all  on  their 
money  if  its  business  is  unfortunate  and  the 
profits  never  make  their  appearance.  Conse- 
quently the  shareholders  in  a  company  run  all 
the  risks  that  industrial  enterprise  is  heir  to, 
and  the  return,  if  any,  that  comes  into  their 
pockets  depends  on  the  ability  of  the  enterprise 
to  earn  profits  over  and  above  all  that  it  has  to 
pay  for  raw  material,  wages  and  other  working 
expenses,  all  of  which  have  to  be  met  before  the 
shareholder  gets  a  cent. 

In  order  to  meet  the  objections  of  steady- 
going  investors  to  the  risks  involved  by  thus 
becoming  industrial  adventurers,  a  system  has 
grown  up  by  which  the  capital  of  companies  is 


Companies'  Securities  59 

subdivided  into  securities  that  rank  ahead  of 
one  another.  Companies  issue  debts,  like  pub- 
lic bodies,  in  the  shape  of  bonds  or  debentures, 
which  entitle  the  holders  of  them  to  a  stated 
rate  of  interest,  and  no  more,  and  are  often 
repayable  at  a  due  date,  by  drawings  or  other- 
wise. These  are  the  first  charge  on  the  concern 
after  wages  and  other  working  expenses  have 
been  paid,  and  the  shareholders  do  not  get  any 
profit  until  the  interest  on  the  company's  debt 
has  been  met.  Further,  the  actual  capital  held 
by  the  shareholders  is  generally  divided  into 
two  classes,  preferred  and  common,  of  which 
the  preferred  take  a  fixed  rate  before  the  com- 
mon stockholders  get  anything,  and  the  common 
stockholders  take  the  whole  of  any  balance  left 
over.  Sometimes,  the  preferred  holders  have 
a  right  to  further  participation  after  the  com- 
mon have  received  a  certain  amount  of  dividend, 
or  share  of  profit,  and  there  are  almost  endless 
variations  of  the  manner  in  which  the  different 
classes  of  holders  may  claim  to  divide  the  profits, 
by  means  of  preference,  preferred,  ordinary, 
preferred  ordinary,  deferred  ordinary,  founders' 
shares,  management  shares,  etc.,  etc. 


60  Investments  and  Securities 

All  these  variations  in  the  position  of  the 
stockholder,  however,  do  not  alter  the  great 
essential  difference  between  him  and  the  creditor, 
the  man  who  lends  money  to  a  Government  or 
enterprise  with  a  fixed  rate  of  interest,  and,  in 
most  cases,  a  claim  for  repayment  sooner  or 
later.  The  stockholder,  whether  preferred  or 
common,  puts  his  money  into  a  venture  with 
no  claim  for  repayment,  unless  the  company  is 
wound  up,  in  which  case  his  claim  ranks,  of 
course,  after  that  of  every  creditor.  If  he  wants 
to  get  his  money  out  again  he  can  do  so  only  by 
selling  his  stock  or  shares  at  any  price  that  they 
will  fetch  in  the  stock  market. 

Thus,  if  we  take  as  an  example  a  Brewery 
company  with  a  total  debt  and  capital  of  fifteen 
million  dollars,  we  may  suppose  that  it  will  have 
$5,000,000  \y^  per  cent,  mortgage  bonds,  en- 
titling the  creditors  who  own  it  to  interest  at 
that  rate,  and  repayment  in  1935,  $5,000,000 
of  6  per  cent,  cumulative  preferred  stock,  giving 
holders  a  fixed  dividend,  if  earned,  of  6  per 
cent.,  which  dividend  and  all  arrears  have  to 
be  paid  before  the  common  stockholders  get 
anything,  and  $5,000,000  in  common  stock, 


A  Brewery  Company  61 

whose  holders  take  any  balance  that  may  be 
left. 

These  bonds  and  stocks  and  shares  are  the 
machinery  of  international  finance,  by  which 
moneylenders  of  one  nation  provide  borrowers 
in  others  with  the  wherewithal  to  carry  out 
enterprises,  or  make  payments  for  which  they 
have  not  cash  available  at  home.  It  was  shown 
in  a  previous  chapter  that  bills  of  exchange  are 
a  means  by  which  the  movements  of  commodities 
from  market  to  market  are  financed,  and  the 
gap  in  time  is  bridged  between  production  and 
consumption.  Stock  Exchange  securities  are 
more  permanent  investments,  put  into  industry 
for  longer  periods  or  for  all  time.  Midway 
between  them  are  securities  such  as  Treasury 
bills  with  which  Governments  raise  the  wind 
for  a  time,  pending  the  collection  of  revenue, 
and  the  one  or  two  years'  notes  with  which 
American  railroads  lately  financed  themselves 
for  short  periods,  in  the  hope  that  the  conditions 
for  an  issue  of  bonds  with  longer  periods  to  run, 
might  become  more  favourable. 

So  far  we  have  only  considered  the  machinery 
by  which  these  securities  are  created  and  issued 


62  Investments  and  Securities 

to  the  public,  but  it  must  not  be  supposed  that 
investment  is  only  possible  when  new  securities 
are  being  offered.  Many  investors  have  a 
prejudice  against  ever  buying  a  new  security, 
preferring  those  which  have  a  record  and  a 
history  behind  them,  and  buying  them  in  the 
market  whenever  they  have  money  to  invest. 
This  market  is  the  Stock  Exchange  in  which 
securities  of  all  kinds  and  (in  London)  of  all 
countries  are  dealt  in.  Following  the  history 
of  the  Ruritanian  loan,  we  may  suppose  that 
it  will  be  dealt  in  regularly  in  that  section  of 
the  London  Stock  Exchange  in  which  the  loans 
of  foreign  Governments  are  marketed.  Any 
original  subscriber  who  wants  to  turn  his  bonds 
into  money  can  do  so  by  instructing  his  broker 
to  sell  them;  anyone  who  wants  to  do  so  can 
acquire  a  holding  in  them  by  a  purchase.  The 
terms  on  which  they  will  be  bought  or  sold  will 
depend  on  the  variations  in  the  demand  for, 
and  supply  of,  them.  If  a  number  of  holders 
want  to  sell,  either  because  they  want  cash  for 
other  purposes,  or  because  they  are  nervous 
about  the  political  outlook,  or  because  they  think 
that  money  is  going  to  be  scarce  and  so  there 


Stock  Exchange  Dealings  63 

will  be  better  opportunities  for  investment  later 
on,  then  the  price  will  droop.  But  if  the  political 
sky  is  serene  and  people  are  saving  money  fast 
and  investing  it  in  Stock  Exchange  securities, 
then  the  price  will  go  up  and  those  who  want 
to  buy  them  will  pay  more.  The  price  of  all  se- 
curities, as  of  everything  else,  depends  on  the 
extent  to  which  people  who  have  not  got  them 
want  to  buy  them,  in  relation  to  the  extent  to 
which  those  who  have  got  them  are  ready  to 
part  with  them.  Price  is  ultimately  a  question 
of  what  people  think  about  things,  and  this  is 
why  the  fluctuations  in  the  price  of  Stock  Ex- 
change securities  are  so  incalculable  and  often 
so  irrational.  If  a  sufficient  number  of  mis- 
guided people  with  money  in  their  pockets  think 
that  a  bad  security  is  worth  buying  they  will 
put  the  price  of  it  up  in  the  face  of  the  logic  of 
facts  and  all  the  arguments  of  reason.  These 
wild  fluctuations,  of  course,  take  place  chiefly 
in  the  more  speculative  securities.  Shares  in 
a  gold  mine  can  go  to  any  price  that  the  cre- 
dulity of  buyers  dictates,  since  there  is  no  limit 
to  the  amount  of  gold  that  people  can  imagine 
to  be  under  the  ground  in  its  territory. 


64  Investments  and  Securities 

All  the  Stock  Exchanges  of  the  world  are  in 
communication  with  one  another  by  telegraph, 
or  telephone,  and  so  their  feelings  about  prices 
react  on  one  another's  nerves  and  imaginations, 
and  the  Stock  Exchange  price  list  may  be  said 
to  be  the  language  of  international  finance,  as 
the  bill  of  exchange  is  its  currency. 

In  this  matter  of  the  issue  of  new  Stock  Ex- 
change securities  international  finance  presents 
no  new  problems  to  America.  She  has  done 
so  much  financing  for  her  own  industries  that 
when  foreign  Governments,  municipalities,  or 
companies  come  to  her  in  her  new  capacity  as 
international  moneylender  she  has  all  the  ma- 
chinery ready.  She  has,  indeed,  used  it  before 
for  foreign  purposes,  having  lent  money  to 
England  during  the  South  African,  and  to  Japan 
in  the  Russo-Japanese,  War,  and  having  also, 
in  past  times,  made  considerable  investments  in 
Canada  and  Mexico.  The  American  system 
is  very  similar  to  the  English,  except  that  the 
big  financial  houses  rely  less  on  the  prospectus 
and  the  public  issue  for  placing  securities  with 
investors  and  more  on  the  effort  of  sellers  who 
tour  the  country  for  that  purpose.  The  machinery 


Stock  Exchange  Dealings  65 

is  all  ready,  and  it  only  remains  to  be  seen 
whether,  when  peace  brings  back  normal  eco- 
nomic conditions,  America  will  have  much 
capital  to  spare  for  foreign  countries.  It  may 
be  that  the  development  of  her  great  heritage 
at  home  will  still  absorb  most,  if  not  all,  of  the 
capital  that  her  investors  can  save. 


CHAPTER  IV 

FINANCE  AND  TRADE 

WE  have  seen  that  finance  becomes  international 
when  capital  goes  abroad,  by  being  lent  by 
investors  in  one  country  to  borrowers  in  another, 
or  by  being  invested  in  enterprises  formed  to 
carry  on  some  kind  of  business  abroad.  We 
have  next  to  consider  why  capital  goes  abroad 
and  whether  it  is  a  good  or  a  bad  thing  for  it 
to  do  so. 

Capital  goes  abroad  because  it  is  more  wanted 
in  other  countries  than  in  the  country  of  its 
origin,  and  consequently  those  who  invest 
abroad  are  able  to  do  so  to  greater  advantage. 
In  countries  like  England  and  France,  where 
there  have  been  for  many  centuries  thrifty  folk 
who  have  saved  part  of  their  income,  and  placed 
their  savings  at  the  disposal  of  industry,  it  is 
clear  that  industry  is  likely  to  be  better  supplied 

66 


Need  for  Capital  67 

with  capital  than  in  the  new  countries  which 
have  been  more  lately  peopled,  and  in  which 
the  store  of  accumulated  goods  is  less  adequate 
to  the  industrial  needs  of  the  community.  For 
we  must  always  remember  that  though  we  usu- 
ally speak  and  think  of  capital  as  so  much 
money  it  is  really  goods  and  property.  In 
countries  with  a  developed  banking  system, 
money  consists  chiefly  of  credit  in  the  books  of 
banks,  which  can  be  created  only  because  there 
is  property  on  which  the  banks  can  make 
advances,  or  because  there  is  property  expressed 
in  securities  in  which  the  banks  can  invest  or 
against  which  they  can  lend.  Because  former 
generations  of  Englishmen  did  not  spend  all 
their  incomes  on  their  own  personal  comfort  and 
amusement  but  put  a  large  part  of  them  into 
railways  and  factories  and  shipbuilding  yards, 
England  is  now  reasonably  well  supplied  with 
the  machinery  of  production  and  the  means  of 
transport.  Whether  it  might  not  be  much  better 
so  equipped  is  a  question  with  which  we  are 
not  at  present  concerned.  At  least  it  may  be 
said  that  it  is  more  fully  provided  in  these 
respects  than  new  countries  like  America,  the 


68  Finance  and  Trade 

British  colonies,  and  Argentina,  or  old  countries- 
like  Russia  and  China  in  which  industrial  de- 
velopment is  a  comparatively  late  growth,  so 
that  there  has  been  less  time  for  the  storing  up, 
by  saving,  of  the  necessary  machinery. 

So  it  comes  about  that  new  countries  were  in 
greater  need  of  capital  than  old  ones  and  con- 
sequently were  ready  to  pay  a  higher  rate  of 
interest  for  it  to  lenders  or  to  tempt  shareholders 
with  a  higher  rate  of  profit.  And  so  the  op- 
portunity was  given  to  investors  in  England  to 
develop  the  agricultural  or  industrial  resources 
of  all  the  countries  under  the  sun  to  their  own 
profit  and  to  that  of  the  countries  that  it  supplies. 
When,  for  example,  the  Government  of  one  of 
the  Australian  colonies  came  to  London  to 
borrow  money  for  a  railway,  it  said  in  effect  to 
English  investors:  "Your  railways  at  home  have 
covered  your  country  with  such  a  network  that 
there  are  no  more  profitable  lines  to  be  built. 
The  return  that  you  get  from  investing  in  them 
is  not  too  attractive  in  view  of  all  the  trade 
risks  to  which  they  are  subject.  Do  not  put 
your  money  into  them,  but  lend  it  to  us.  We 
will  take  it  and  build  a  railway  in  a  country 


Trade  before  Finance  69 

which  wants  them,  and,  whether  the  railway 
pays  or  no,  you  will  be  creditors  of  a  Colonial 
Government  with  the  whole  wealth  of  the  colony 
pledged  to  pay  you  interest  and  pay  back  your 
money  when  the  loan  falls  due  for  repayment." 
For  in  Australia  the  railways  have  all  been  built 
by  the  Colonial  Governments,  partly  because 
they  wished,  by  pledging  their  collective  credit, 
to  get  the  money  as  cheaply  as  possible,  and  keep 
the  profits  from  them  in  their  own  hands,  and 
partly  probably  because  they  did  not  wish 
the  management  of  their  railways  to  be  in  the 
hands  of  London  boards.  In  Argentina,  on  the 
other  hand,  the  chief  railways  have  been  built, 
not  by  the  Government  but  by  English  com- 
panies, shareholders  in  which  have  taken  all  the 
risks  of  the  enterprise,  and  have  thereby  secured 
handsome  profits  to  themselves,  tempered  with 
periods  of  bad  traffic  and  poor  returns. 

For  many  years  there  was  a  good  deal  of 
prejudice  in  England  against  investing  abroad, 
especially  among  the  more  sleepy  classes  of 
investors  who  had  made  their  money  in  home 
trade,  and  liked  to  keep  it  there  when  they 
invested  it.  As  traders,  Englishmen  learnt  a 


7o  Finance  and  Trade 

world-wide  outlook  many  centuries  before  they 
did  so  as  investors.  To  send  a  ship  with  a  cargo 
of  English  goods  to  a  far  off  country  to  be  ex- 
changed into  its  products  was  a  risk  that 
England's  enterprising  forefathers  took  readily. 
The  ship  took  in  its  return  cargo  and  came  home, 
bringing  its  sheaves  with  it  in  a  reasonable  time, 
though  the  Antonios  of  the  period  sometimes  had 
awkward  moments  if  their  ships  were  delayed 
by  bad  weather,  and  they  were  liable  on  a  bond 
to  Shylock.  But  it  was  quite  another  matter 
to  lend  money  in  a  distant  country  when  com- 
munication was  slow  and  difficult,  and  social 
and  political  conditions  had  not  gained  the 
stability  that  is  needed  before  contracts  can  be 
entered  into  extending  over  many  years.  Inter- 
national moneylending  took  place,  of  course,  in 
the  middle  ages,  and  everybody  knows  Motley's 
great  description  of  the  consternation  that  shook 
Europe  when  Philip  the  Second  repudiated  his 
debts  "to  put  an  end  to  such  financiering  and 
unhallowed  practices  with  bills  of  exchange."* 
But  though  there  were  moneylenders  in  those 
days  who  obliged  foreign  potentates  with  loans, 

*  United  Netherlands,  chap,  xxxii. 


Investment  at  Home  71 

the  business  was  in  the  hands  of  expert  pro- 
fessional specialists,  and  there  was  no  medieval 
counterpart  of  the  country  doctor  whom  we 
have  imagined  to  be  developing  industry  all 
over  the  world  by  placing  his  savings  in  foreign 
countries.  There  could  be  no  investing  public 
until  there  were  large  classes  that  had  accumu- 
lated wealth  by  saving,  and  until  the  discovery 
of  the  principle  of  limited  liability  enabled  ad- 
venturers to  put  their  savings  into  industry 
without  running  the  risk  of  losing  not  only  what 
they  put  in,  but  all  else  that  they  possessed. 
By  means  of  this  system,  the  risk  of  a  shareholder 
in  a  company  is  limited  to  a  definite  amount, 
usually  the  amount  that  has  been  paid  up  on  his 
shares  or  stock,  though  in  some  cases,  such  as 
bank  and  insurance  shares,  there  is  a  further 
reserve  liability  which  is  left  for  the  protection 
of  the  companies'  customers. 

In  the  eighteenth  century  a  great  outburst 
of  gambling  in  the  East  Indian  and  South  Sea 
companies,  and  a  horde  of  less  notorious  con- 
cerns, was  a  short-lived  episode  which  must 
have  helped  for  a  very  long  time  to  strengthen 
the  natural  prejudice  that  English  investors  felt 


72  Finance  and  Trade 

in  favour  of  putting  their  money  into  enterprise 
at  home;  and  it  was  still  further  strengthened 
by  the  disastrous  results  of  another  great  plague 
of  bad  foreign  securities  that  smote  London 
just  after  the  war  that  ended  at  Waterloo.  This 
prejudice  survived  up  to  within  living  memory, 
and  I  myself  have  heard  old-fashioned  stock- 
brokers maintain  that,  after  all,  there  was  no 
investment  like  English  Railway  stocks,  because 
investors  could  always  go  and  look  at  their 
property,  which  could  not  run  away.  Gradually, 
however,  the  habit  of  foreign  investment  grew 
in  England  under  the  influence  of  the  higher 
rates  of  interest  and  profit  offered  by  new 
countries,  the  greater  political  stability  that  was 
developed  in  them,  and  political  apprehensions 
at  home.  In  fact  it  grew  so  fast  and  so  lustily 
that  there  came  a  time,  not  many  years  ago, 
when  investments  at  home  were  under  a  cloud, 
and  many  Englishmen,  when  asking  their  brokers 
where  and  how  to  place  their  savings,  stipulated 
that  they  must  be  put  somewhere  abroad. 

This  was  at  a  time  when  Mr.  Lloyd  George's 
financial  measures  were  arousing  resentment  and 
fear  among  the  investing  classes,  and  when 


Mexico  and  Brazil  73 

preachers  of  the  Tariff  Reform  creed  were  laying 
so  much  stress  on  England's  "dying  industries" 
that  they  were  frightening  those  who  trusted 
them  into  the  belief  that  the  sun  was  setting  on 
British  industrial  greatness.  The  effect  of  this 
belief  was  to  bring  down  the  prices  of  English 
securities,  and  to  raise  those  of  other  countries, 
as  investors  changed  from  the  former  into  the 
latter. 

So  the  theory  that  England  was  industrially 
and  financially  doomed  got  another  argument 
from  its  own  effects,  and  its  missionaries  were 
able  to  point  to  the  fall  in  Consols  and  the  rela- 
tive steadiness  of  foreign  and  colonial  securities 
which  their  own  preaching  had  brought  about, 
as  fresh  evidence  of  its  truth.  At  the  same  time 
fear  of  Socialistic  legislation  at  home  had  the 
humorous  result  of  making  British  investors 
fear  to  touch  Consols,  but  rush  eagerly  to  buy 
the  securities  of  Colonial  Governments  which 
had  gone  much  further  in  the  direction  of 
Socialism  than  England.  Those  were  great 
days  for  all  who  handled  the  machinery  of  over- 
sea investment  and  in  the  last  few  years  before 
the  war  it  is  estimated  that  England  was  placing 


74  Finance  and  Trade 

some  200  millions  sterling  a  year  in  her  colonies 
and  dependencies  and  in  foreign  countries. 
Old-fashioned  folk  who  still  believed  in  the 
industrial  strength  and  financial  stability  of  their 
native  land  waited  for  the  reaction  which  was 
bound  to  follow  when  some  of  the  countries 
into  which  England  poured  capital  so  freely, 
began  to  find  a  difficulty  in  paying  the  interest; 
and  just  before  the  war  this  reaction  began  to 
happen,  in  consequence  of  the  default  in  Mexico 
and  the  financial  embarrassments  of  Brazil. 
Mexico  had  shown  that  the  political  stability 
which  investors  had  believed  it  to  have  achieved 
was  a  very  thin  veneer,  and  a  series  of  revolutions 
had  plunged  that  hapless  land  into  anarchy. 
Brazil  was  suffering  from  a  heavy  fall  in  the 
price  of  one  of  her  chief  staple  products,  rubber, 
owing  to  the  competition  of  plantations  in  Cey- 
lon, Straits  Settlements,  and  elsewhere,  and  was 
finding  difficulty  in  meeting  the  interest  on  the 
big  load  of  debt  that  the  free  facilities  given  by 
English  and  French  investors  had  encouraged 
her  to  pile  up.  She  had  promised  retrenchment 
at  home,  and  another  big  loan  was  being  hatched 
to  tide  her  over  her  difficulties — or  perhaps 


Neutral  Moneylenders  75 

increase  them — when  the  war  cloud  began  to 
gather  and  she  has  had  to  resort  for  the  second 
time  in  her  history  to  the  indignity  of  a  funding 
scheme.  By  this  ' '  new  way  of  paying  old  debts ' ' 
she  does  not  pay  interest  to  her  bondholders  in 
cash,  but  gives  them  promises  to  pay  instead, 
and  so  increases  the  burden  of  her  debt,  which 
she  hopes  some  day  to  be  able  to  shoulder  again, 
by  resuming  payments  in  cash. 

Mexico  and  Brazil  were  not  the  only  countries 
that  were  showing  signs,  in  1914,  of  having 
indulged  too  freely  in  the  opportunities  given 
them  by  the  eagerness  of  English  and  French 
investors  to  place  money  abroad.  It  looked  as 
if  in  many  parts  of  the  earth  a  time  of  financial 
disillusionment  was  dawning,  the  probable  result 
of  which  would  have  been  a  strong  reaction 
in  favour  of  investment  at  home.  Then  came 
the  war  with  a  short  sharp  spell  of  financial 
chaos  followed  by  a  halcyon  period  for  young 
countries,  which  enabled  them  to  sell  their 
products  at  greatly  increased  prices  to  the 
warring  powers  and  so  to  meet  their  debt  charges 
with  an  ease  that  they  had  never  dreamt  of,  and 
even  to  find  themselves  lending,  out  of  the 


76  Finance  and  Trade 

abundance  of  their  war  profits,  money  to  their 
creditors.  America  has  led  the  way  with  a  loan 
of  £100,000,000  to  France  and  England,  and 
Canada  has  placed  10  millions  sterling  of  credit 
at  the  disposal  of  the  Mother  Country.  There 
can  be  little  doubt  that  if  the  war  goes  on,  and 
the  neutral  countries  continue  to  pile  up  profits 
by  selling  food  and  war  materials  to  the  bel- 
ligerents, many  of  them  will  find  it  convenient 
to  lend  some  of  their  gains  to  their  customers. 
America  has  also  been  taking  the  place  of  France 
and  England  as  international  moneylenders  by 
financing  Argentina;  and  a  great  company 
has  been  formed  in  New  York  to  promote  inter- 
national activity,  on  the  part  of  Americans,  in 
foreign  countries.  "And  thus  the  whirligig 
of  time,"  assisted  by  the  eclipse  of  civilization 
in  Europe,  "brings  in  his  revenges"  and  turns 
debtors  into  creditors.  In  the  meantime  it  need 
hardly  be  said  that  investment  at  home  has 
become  for  the  time  being  a  matter  of  patriotic 
duty  for  every  Englishman,  since  the  financing 
of  the  war  has  the  first  and  last  claim  on  his 
savings. 

Our  present  concern,  however,  is  not  with 


Goods  and  Services  77 

the  war  problems  of  to-day,  but  with  the  pro- 
cesses of  international  finance  in  the  past,  and 
perhaps,  before  we  get  to  the  end,  with  some 
attempt  to  hazard  a  glimpse  into  its  arrange- 
ments in  the  future.  What  was  the  effect  on 
England,  and  on  the  countries  to  whom  she 
lent,  of  her  money  lending  activity  in  the  past? 
As  soon  as  we  begin  to  look  into  this  question 
we  see  once  more  how  close  is  the  connection 
between  finance  and  trade,  and  that  finance  is 
powerless  unless  it  is  supported  and  in  fact  made 
possible  by  industrial  or  commercial  activity 
behind  it.  England's  international  trade  made 
her  international  finance  possible  and  necessary. 
A  country  can  only  lend  money  to  others  if  it  has 
goods  and  services  to  supply,  for  in  fact  it  lends 
not  money  but  goods  and  services. 

In  the  beginnings  of  international  trade  the 
older  countries  exchange  their  products  for  the 
raw  materials  and  food  produced  by  the  new 
ones.  Then,  as  emigrants  from  the  old  countries 
go  out  into  the  new  ones,  they  want  to  be 
supplied  with  the  comforts  and  appliances  of 
the  older  civilizations,  such  as,  to  take  an 
obvious  example,  railways.  But  as  the  produc- 


78  Finance  and  Trade 

tions  of  the  new  countries,  at  their  early  stage  of 
development,  do  not  suffice  to  pay  for  all  the 
material  and  machinery  needed  for  building 
railways,  they  borrow,  in  effect,  these  materials, 
in  the  expectation  that  the  railways  will  open 
out  their  resources,  enable  them  to  put  more  land 
under  the  plough  and  bring  more  stuff  to  the 
seaboard,  to  be  exchanged  for  the  products  of 
Europe.  The  new  country,  New  Zealand  or 
Japan,  or  whichever  it  may  be,  raises  a  loan  in 
England  for  the  purpose  of  building  a  railway, 
but  it  does  not  take  the  money  raised  by  the 
loan  in  the  form  of  money,  but  in  the  form  of 
goods  needed  for  the  railway,  and  sometimes  in 
the  form  of  the  services  of  those  who  plan  and 
build  it.  It  does  not  follow  that  all  the  stuff  and 
services  needed  for  the  enterprise  are  necessarily 
bought  in  the  country  that  lends  the  money ;  for 
instance,  if  Japan  borrows  money  from  England 
for  a  railway,  she  may  buy  some  of  the  steel 
rails  and  locomotives  in  Belgium,  and  instruct 
London  to  pay  Belgium  for  her  purchases.  If  so, 
instead  of  sending  goods  to  Japan  England  has 
to  send  goods  or  services  to  Belgium,  or  pay 
Belgium  with  the  claim  on  some  other  country 


Claims  on  Industry  79 

that  she  has  established  by  sending  goods  or 
services  to  it.  But,  however  long  the  chain  may 
be,  the  practical  fact  is  that  when  England  lends 
money  she  lends  somebody  the  right  to  claim 
goods  or  services  from  her,  whether  they  are 
taken  from  her  by  the  borrower,  or  by  somebody 
to  whom  the  borrower  gives  a  claim  on  her. 

If,  whenever  England  granted  a  loan,  she  had 
to  send  the  money  to  the  borrower  in  the  form  of 
gold,  her  gold  store  would  soon  be  used  up,  and 
she  would  have  to  leave  off  lending.  In  other 
words,  her  financiers  would  have  to  retire  from 
business  very  quickly  if  it  were  not  that  her 
manufacturers  and  shipowners  and  all  the  rest 
of  her  industrial  army  produced  the  goods  and 
services  to  meet  the  claims  on  her  industry  given, 
or  rather  lent,  to  other  countries  by  the  machin- 
ery of  finance. 

This  obvious  truism  is  often  forgotten  by 
those  who  look  on  finance  as  an  independent 
influence  that  can  make  money  power  out  of 
nothing;  and  those  who  forget  it  are  very  likely 
to  find  themselves  entangled  in  a  maze  of  error. 
We  can  make  the  matter  a  little  clearer  if  we 
go  back  to  the  original  saver,  whose  money,  or 


8o  Finance  and  Trade 

claims  on  industry,  is  handled  by  the  professional 
financier.  Those  who  save  do  so  by  going 
without  things.  Instead  of  spending  their 
earnings  on  immediate  enjoyment  they  spend 
part  of  them  in  providing  somebody  else  with 
goods  that  they  need,  and  taking  from  that 
somebody  else  an  annual  payment  for  the  use 
of  these  goods  for  a  certain  period,  after  which, 
if  it  is  a  case  of  a  loan,  the  transaction  is  closed 
by  repayment  of  the  advance,  which  again  is 
effected  by  a  transfer  of  goods.  When  our  Eng- 
lish country  doctor  subscribes  to  an  Australian 
loan  raised  by  a  colony  for  building  a  railway,  he 
hands  over  to  the  colony  money  which  a  less 
thrifty  citizen  would  have  spent  on  pleasures 
and  amusements,  and  the  colony  uses  it  to  buy 
railway  material.  Thus  in  effect  the  doctor  is 
spending  his  money  in  making  a  railway  in 
Australia.  He  is  induced  to  do  so  by  the  promise 
of  the  colony  to  give  him  £4  every  year  for  each 
£100  that  he  lends.  If  there  were  not  enough 
people  like  him  to  put  money  into  industry 
instead  of  spending  it  on  themselves,  there  could 
be  no  railway  building  or  any  other  form  of 
industrial  growth.  It  is  often  contended  that  a 


State  Capitalism  81 

reconstruction  of  society  on  a  Socialistic  basis 
would  abolish  the  capitalist ;  but  in  fact  it  would 
make  everybody  a  capitalist  because  the  State 
would  have  to  make  the  citizens  as  a  whole  go 
without  certain  immediate  enjoyments  and  work 
on  the  production  of  the  machinery  of  industry. 
Instead  of  saving  being  left  to  the  individual  and 
rewarded  by  a  rate  of  interest,  it  would  be 
imposed  on  all  and  rewarded  by  a  greater  pro- 
ductive power,  and  consequent  increase  in 
commodities,  enjoyed  by  the  community  and 
distributed  among  all  its  members.  The  ad- 
vantages, on  paper,  of  such  an  arrangement  over 
the  present  system  are  obvious.  Whether  they 
would  be  equally  obvious  in  practice  would 
depend  on  the  discretion  with  which  the  Govern- 
ment handled  the  enormous  responsibility 
placed  in  its  hands.  But  the  essential  fact  that 
capital  can  be  got  only  by  being  saved,  and 
earns  the  reward  that  it  gets,  would  remain  as 
strongly  in  force  as  ever,  and  will  do  so  until  we 
have  learnt  to  make  goods  out  of  nothing  and 
without  effort. 

Going  back  to  our  English  doctor,  who  lends 
railway  material  to  an  Australian  colony,  we  see 


82  Finance  and  Trade 

that  every  year  for  each  £100  lent  the  colony  has 
to  send  him  £4.  This  it  can  only  do  if  its  mines 
and  fields  and  factories  can  turn  out  metals 
.or  wheat  or  wool,  or  other  goods  which  can  be 
shipped  to  England  or  elsewhere  and  be  sold, 
so  that  the  doctor's  £4  is  provided.  And  so 
though  on  both  sides  the  transaction  is  expressed 
in  money  it  is  in  fact  carried  out  in  goods,  both 
when  the  loan  is  made  and  the  interest  is  paid. 
And  finally  when  the  loan  is  paid  back  again, 
the  colony  must  have  sold  goods  to  provide 
repayment,  unless  it  meets  its  debts  by  raising 
another.  But  when  a  loan  is  well  spent  on  a 
railway  that  is  needed  for  the  development  of  a 
fertile  or  productive  district,  it  justifies  itself  by 
cheapening  transport  and  quickening  the  output 
of  wealth  in  such  a  manner  that  the  increased 
volume  of  goods  that  it  has  helped  to  create 
easily  meets  the  interest  due  to  lenders,  provides 
a  fund  for  its  redemption  at  maturity,  and 
leaves  the  borrower  better  off,  with  a  more  fully 
equipped  productive  system. 

Since,  then,  there  is  this  close  and  obvious 
connection  between  finance  and  trade,  it  is 
inevitable  that  all  who  partake  in  the  activities 


A  Balance  in  Goods  83 

of  international  finance  should  find  their  trade 
quickened  by  it.  England  has  lent  money 
abroad  because  she  is  a  great  producer,  and 
certain  classes  of  Englishmen  are  savers,  so 
that  there  was  a  balance  of  goods  available  for 
export,  to  be  lent  to  other  countries.  In  the 
early  years  of  the  nineteenth  century,  when 
England's  industrial  power  was  first  beginning  to 
gather  strength,  she  used  regularly  to  export 
goods  to  a  greater  value  than  she  imported. 
These  were  the  goods  that  she  was  lending 
abroad,  clearly  showing  themselves  in  her  trade 
ledger.  Since  then  the  account  has  been  com- 
plicated by  the  growth  of  the  amount  that  her 
debtors  owe  her  every  year  for  interest,  and  by 
the  huge  earnings  of  her  merchant  navy,  which 
other  countries  pay  by  shipping  goods  to  her,  so 
that,  by  the  growth  of  these  items,  the  trade 
balance  sheet  has  been  turned  in  the  other 
direction,  and  in  spite  of  her  lending  larger  and 
larger  amounts  all  over  the  world  she  now  has  a 
balance  of  goods  coming  in.  Interest  due  to 
England  and  shipping  freights  and  the  com- 
missions earned  by  her  bankers  and  insurance 
companies  were  estimated  before  the  war  to 


84  Finance  and  Trade 

amount  to  something  like  350  millions  a  year, 
so  that  she  was  able  to  lend  other  countries  some 
200  millions  or  more  in  a  year  and  still  take  from 
them  a  very  large  balance  in  goods.  After  the 
war  this  comfortable  state  of  affairs  will  have 
been  modified  by  the  sales  that  she  is  making 
now  in  New  York  of  the  American  Railroad 
bonds  and  shares  that  represented  the  savings 
that  she  had  put  into  America  in  former  years, 
and  by  the  extent  of  her  war  borrowings  in 
America,  and  elsewhere,  if  she  widens  the  circle 
of  her  creditors.  The  effect  of  this  will  be  that 
she  will  owe  America  for  interest  on  the  money 
that  it  is  lending  her,  and  that  America  will  owe 
her  less  interest,  owing  to  the  blocks  of  securities 
now  being  sent  back  across  the  Atlantic.  Against 
this  England  will  be  able  to  set  debts  due  to  her 
from  her  Allies,  but  if  her  borrowings  and  sales 
of  securities  exceed  her  lendings  as  the  war  goes 
on,  she  will  thereby  be  poorer.  England's  power 
as  a  creditor  country  will  be  less,  until  by  hard 
work  and  strict  saving  she  has  restored  it.  This 
she  can  very  quickly  do,  if  she  remembers  and 
applies  the  lessons  that  war  is  teaching  her  about 
the  number  of  people  able  to  work,  whose 


England's  Position  85 

capacity  was  hitherto  left  fallow,  that  England 
contained,  and  also  about  the  ease  with  which 
she  can  dispense,  when  a  great  crisis  makes  her 
sensible,  with  many  of  the  absurdities  and 
futilities  on  which  much  of  her  money,  and  pro- 
ductive capacity,  used  to  be  wasted. 

But  whatever  England's  position  at  the  end 
of  the  war  may  be,  there  can  be  no  doubt  that 
America,  and  other  neutral  countries  such  as 
Holland  and  Scandinavia,  will  have  made  a 
great  stride  forward  in  financial  growth,  owing 
to  the  big  profits  that  the  war  is  pouring  into  the 
pockets  of  their  producers. 


CHAPTER  V 

THE  BENEFITS  OF  INTERNATIONAL  FINANCE 

WHEN  once  we  have  recognized  how  close  is  the 
connection  between  finance  and  trade,  we  have 
gone  a  long  way  towards  seeing  the  greatness 
of  the  service  that  finance  renders  to  mankind, 
whether  it  works  at  home  or  abroad.  At  home 
we  owe  our  factories  and  our  railways  and  all 
the  marvellous  equipment  of  our  power  to  make 
things  that  are  wanted,  to  the  quiet,  prosaic, 
and  often  rather  mean  and  timorous  people  who 
have  saved  money  for  a  rainy  day,  and  put  it 
into  industry  instead  of  into  satisfying  their 
immediate  wants  and  cravings  for  comfort  and 
enjoyment.  It  is  equally,  perhaps  still  more, 
true,  that  we  owe  them  to  the  brains  and  energy 
of  those  who  have  planned  and  organized  the 
equipment  of  industry,  and  the  thews  and 
sinews  of  those  who  have  done  the  heavy  work. 

86 


Opening  Markets  87 

But  brain  and  muscle  would  have  been  alike 
powerless  if  there  had  not  been  saving  folk  who 
lent  them  raw  material,  and  provided  them 
with  the  means  of  livelihood  in  the  interval 
between  the  beginning  of  an  industry  and  the 
day  when  its  product  is  sold  and  paid  for. 

Abroad,  the  work  of  finance  has  been  even 
more  advantageous  to  mankind,  for  since  it 
has  been  shown  that  international  finance  is  a 
necessary  part  of  the  machinery  of  international 
trade,  it  follows  that  all  the  benefits,  economic 
and  other,  which  international  trade  has  wrought 
for  us,  are  inseparably  and  inevitably  bound  up 
with  the  progress  of  international  finance.  If 
England  had  never  fertilized  the  uttermost  parts 
of  the  earth  by  lending  them  money  and  sending 
them  goods  in  payment  of  the  sums  lent,  she 
never  could  have  enjoyed  the  stream  that  pours 
in  from  them  of  raw  material  and  cheap  food, 
which  has  sustained  her  industry,  fed  her  popula- 
tion, and  given  them  a  standard  of  general 
comfort  such  as  their  forefathers  could  never 
have  imagined.  It  is  true  that  at  the  same  time 
she  has  benefited  others,  besides  her  own  custom- 
ers and  debtors.  England  has  opened  up  the 


88  Benefits  of  Finance 

world  to  trade  and  other  countries  reap  an 
advantage  by  being  able  to  use  the  openings 
that  she  has  made.  It  is  sometimes  argued  that 
she  has  in  fact  merely  made  the  paths  of  her 
competitors  straight,  and  that  by  covering 
Argentina  with  a  network  of  railways  and  so 
enormously  increasing  its  power  to  grow  things 
and  so  to  buy  things,  English  moneylenders  have 
been  making  an  opportunity  for  German  ship- 
builders to  send  liners  to  the  Plate  and  for 
German  manufacturers  to  undersell  Englishmen 
with  cheap  hardware  and  cotton  goods.  This  is, 
undoubtedly,  true.  The  great  industrial  ex- 
pansion of  Germany  between  1871  and  1914, 
has  certainly  been  helped  by  the  paths  opened 
for  it  all  over  the  world  by  English  trade  and 
finance;  and  America,  England's  lusty  young 
rival,  that  is  gaining  so  much  strength  from  the 
war  in  which  Europe  is  weakening  itself  indus- 
trially and  financially,  will  owe  much  of  the  ease 
of  her  prospective  expansion  to  spade-work  done 
by  the  sleepy  Britishers.  It  may  almost  be 
said  that  England  and  France  as  the  great 
providers  of  capital  to  other  countries  have 
made  a  world-wide  trade  possible  on  its  present 


The  World  Enriched  89 

scale.  The  work  they  have  done  for  their  own 
benefit  has  certainly  helped  others,  but  it  does 
not,  therefore,  follow  that  it  has  damaged  them. 
Looking  at  the  matter  from  a  purely  business 
point  of  view,  we  see  that  the  great  forward 
movement  in  trade  and  finance  that  England  has 
led  and  fostered,  has  helped  her  even  by  helping 
her  rivals.  In  the  first  place,  it  gives  her  a  direct 
benefit  as  the  owners  of  the  mightiest  fleet  of 
merchant  ships  that  the  world  has  seen.  Eng- 
land does  nearly  half  the  world's  carry  ing- trade, 
and  so  has  reason  to  rejoice  when  other  nations 
send  goods  to  the  ports  that  she  has  opened. 
By  her  eminence  in  finance  and  the  prestige  of  a 
bill  of  exchange  drawn  on  London,  she  has  also 
supplied  the  credit  by  which  goods  have  been 
paid  for  in  the  country  of  their  origin,  and  nursed 
until  they  have  come  to  the  land  in  which  they 
are  wanted,  and  even  until  the  day  when  they 
have  been  turned  into  a  finished  product  and 
passed  into  the  hands  of  the  final  consumer.  But 
there  is  also  the  indirect  advantage  that  England 
gains,  as  a  nation  of  producers  and  financiers, 
from  the  growing  wealth  of  other  nations.  The 
more  wealthy  they  grow,  the  more  goods  they 


90  Benefits  of  Finance 

produce  and  want  to  sell  to  her,  and  they  cannot 
sell  to  her  unless  they  likewise  buy  from  her. 
If  she  helped  Germany  to  grow  rich,  she  also 
helped  her  to  become  one  of  her  best  customers 
and  so  to  help  her  to  grow  rich.  Trade  is  nothing 
but  an  exchange  of  goods  and  services.  Other 
countries  are  not  so  philanthropic  as  to  kill 
England's  trade  by  making  her  presents  of  their 
products,  and  from  the  strictly  economic  point 
of  view,  it  pays  her  to  see  all  the  world,  which  is 
her  market,  a  thriving  hive  of  industry  eager  to 
sell  her  as  much  as  it  can.  It  may  be  that  as 
other  countries,  with  the  help  of  her  capital  and 
example,  develop  industries  in  which  she  has 
been  pre-eminent,  they  may  force  her  to  supply 
them  with  services  which  she  will  be  less  proud 
to  produce.  If,  for  example,  the  Americans 
were  to  drive  England  out  of  the  neutral  markets 
with  their  cotton  goods,  and  then  spent  their 
profits  by  revelling  in  her  hotels  and  thronging 
her  theatres  and  shooting  in  Scottish  deer  forests, 
and  buying  positions  in  English  society  for  their 
daughters,  England  might  feel  that  the  course 
of  industry  might  still  be  profitable  to  her,  but 
that  it  was  less  satisfactory.  On  the  other  hand, 


Cheap  Foreign  Produce  91 

it  would  be  absurd  for  her  to  expect  the  rest  of 
the  world  to  stand  still  industrially  in  order  that 
she  may  make  profits  from  producing  things  for 
it  that  it  is  quite  able  to  make  for  itself. 

For  the  present  we  are  concerned  with  the 
benefits  of  international  finance,  which  have 
been  shown  to  begin  with  its  enormous  impor- 
tance as  the  handmaid  of  international  trade. 
Trade  between  nations  is  desirable  for  exactly 
the  same  reason  as  trade  between  one  man  and 
another,  namely,  that  each  is,  naturally  or 
otherwise,  better  fitted  to  grow  or  make  certain 
things,  and  so  an  exchange  is  to  their  mutual 
advantage.  If  this  is  so,  as  it  clearly  is,  in  the 
case  of  two  men  living  in  the  same  street,  it  is 
evidently  very  much  more  so  in  the  case  of  two 
peoples  living  in  different  climates  and  on  differ- 
ent soils,  and  so  each  of  them,  by  the  nature  of 
their  surroundings,  able  to  make  and  grow  things 
that  are  impossible  to  the  other.  English  in- 
vestors, by  developing  the  resources  of  other 
countries,  through  the  machinery  of  international 
finance,  enable  Englishmen  to  sit  at  home  in 
their  inclement  isle,  and  enjoy  the  fruits  of 
tropical  skies  and  soils.  It  may  be  true  that  if 


92  Benefits  of  Finance 

they  had  not  done  so  they  would  have  developed 
the  resources  of  their  own  country  more  thor- 
oughly, using  it  less  as  a  pleasure  ground,  and 
more  as  a  farm  and  kitchen  garden,  and  that 
they  would  have  had  a  larger  number  of  their 
own  folk  working  for  them  under  their  own  sky. 
Instead  of  thriving  on  the  produce  of  foreign 
climes  and  foreign  labour  that  comes  to  them 
to  pay  interest,  they  would  have  lived  more  on 
home-made  stuff  and  had  more  healthy  citizens 
at  work  on  their  soil.  On  the  other  hand,  they 
would  have  been  hit  hard  by  bad  seasons  and 
would  have  enjoyed  a  much  less  diversified  diet. 
As  it  is,  they  take  their  tea  and  tobacco  and 
coffee  and  sugar  and  wine  and  oranges  and 
bananas  and  cheap  bread  and  meat,  all  as  a 
matter  of  course,  but  they  could  never  have 
enjoyed  them  if  international  trade  had  not 
brought  them  to  their  shores,  and  if  international 
finance  had  not  quickened  and  cheapened  their 
growth  and  transport  and  marketing.  Inter- 
national trade  and  finance,  if  given  a  free  hand, 
may  be  trusted  to  bring  about,  between  them, 
the  utmost  possible  development  of  the  power 
of  the  world  to  grow  and  make  things  in  the 


War  and  Finance  93 

places  where  they  can  be  grown  and  made 
most  cheaply  and  abundantly,  in  other  words,  to 
secure  for  human  effort,  working  on  the  available 
raw  material,  the  greatest  possible  harvest  as 
the  reward  of  its  exertions. 

All  this  is  very  obvious  and  very  material,  but 
international  finance  does  much  more,  for  it  is  a 
great  educator  and  a  mighty  missionary  of  peace 
and  goodwill  between  nations.  This  also  is 
obvious  on  a  moment's  reflection,  but  it  will  be 
rejected  as  a  flat  misstatement  by  many  whose 
opinion  is  entitled  to  respect,  and  who  regard 
international  finance  as  a  bloated  spider  which 
sits  in  the  middle  of  a  web  of  intrigue  and 
chicanery,  enticing  hapless  mankind  into  its 
toils  and  battening  on  bloodshed  and  war.  So 
clear-headed  a  thinker  as  Mr.  Philip  Snowden, 
M.P.,  publicly  expressed  the  view  not  long  ago 
that  "the  war  was  the  result  of  secret  diplomacy 
carried  on  by  diplomatists  who  had  conducted 
foreign  policy  in  the  interests  of  militarists  and 
financiers."  *  Now  Mr.  Snowden  may  possibly 
be  right  in  his  view  that  the  war  was  produced 
by  diplomacy  of  the  kind  that  he  describes,  but 

*  Quoted  by  the  Financial  News  of  London,  of  September  28, 1915. 


94  Benefits  of  Finance 

with  all  deference  I  submit  that  he  is  wholly 
wrong  if  he  thinks  that  the  financiers,  as  finan- 
ciers, wanted  war  either  in  England  or  in  Ger- 
many or  anywhere  else.  If  they  wanted  war  it 
was  because  they  believed,  rightly  or  wrongly, 
that  their  country  had  to  fight  for  its  existence, 
or  for  something  equally  well  worth  fighting 
for,  and  so  as  patriotic  citizens,  they  accepted  or 
even  welcomed  a  calamity  that  could  only  cause 
them,  as  financiers,  the  greatest  embarrassment 
and  the  chance  of  ruin.  In  England  the  war  has 
benefited  the  working  classes,  and  enabled  them 
to  take  a  long  stride  forward,  which  we  must  all 
hope  they  will  maintain,  towards  the  improve- 
ment in  their  lot  which  is  so  long  overdue.  It 
has  helped  the  farmers,  put  fortunes  in  the 
pockets  of  the  shipowners,  and  swollen  the 
profits  of  any  manufacturers  who  have  been  able 
to  turn  out  stuff  wanted  for  war  or  for  the  indirect 
needs  of  war.  The  English  industrial  centres  are 
bursting  with  money,  and  the  greater  spending 
power  that  has  been  diffused  by  war  expenditure 
has  made  the  cheap  jewelry  trade  a  thriving 
industry  and  increased  the  consumption  of 
beer^and  spirits  in  spite  of  restrictions  and  the 


Finance  and  Peace  95 

absence  of  men  at  the  front.  Picture  palaces 
are  crammed  nightly,  furs  and  finery  have  had 
a  wonderful  season,  any  one  who  has  a  motor 
car  to  sell  finds  plenty  of  ready  buyers,  and 
second-hand  pianos  are  an  article  that  can  almost 
be  "sold  on  a  Sunday."  But  in  the  midst  of  this 
roar  of  humming  trade,  finance  in  England,  and 
especially  its  international  branch,  lies  stricken 
and  still  gasping  from  the  shock  of  war.  When 
war  comes,  the  price  of  all  property  shrivels. 
This  was  well  known  to  Falstaff,  who,  when  he 
brought  the  news  of  Hotspur's  rebellion,  said, 
"You  may  buy  land  now  as  cheap  as  stinking 
mackerel."  To  most  financial  institutions,  this 
shrivelling  process  in  the  price  of  their  securities 
and  other  assets,  brings  serious  embarrassment, 
for  there  is  no  corresponding  decline  in  their 
liabilities,  and  if  they  have  not  founded  them- 
selves on  the  rock  of  severest  prudence  in  the 
past,  their  solvency  is  likely  to  be  imperilled. 
Finance  knew  that  it  must  suffer.  The  story  has 
often  been  told,  and  though  never  officially 
confirmed,  it  has  at  least  the  merit  of  great 
probability,  that  in  1911  when  the  Morocco 
crisis  made  a  European  war  probable,  the  Ger- 


96  Benefits  of  Finance 

man  Government  was  held  back  by  the  warning 
of  its  financiers  that  war  would  mean  Germany's 
ruin.  It  is  more  than  likely  that  a  similar  warn- 
ing was  given  in  July,  1914,  but  that  the  war 
party  brushed  it  aside.  And  now  that  war  is 
here,  England  is  being  warned  that  high  finance 
is  intriguing  for  peace.  Mr.  Edgar  Crammond, 
a  distinguished  economist  and  statistician,  pub- 
lished an  article  in  the  Nineteenth  Century  of 
September,  1915,  entitled  "High  Finance  and  a 
Premature  Peace,"  calling  attention  to  this 
danger  and  urging  the  need  for  guarding  against 
it.  First  too  bellicose  and  now  too  pacific,  High 
Finance  is  buffeted  and  spat  upon  by  men  of 
peace  and  men  of  war  with  a  unanimity  that 
must  puzzle  it.  It  can  hardly  err  on  both  sides, 
but  of  the  two  accusers  I  think  that  Mr.  Cram- 
mond is  much  more  likely  to  be  right.  But  my 
own  personal  opinion  is  that  both  these  accusers 
are  mistaken,  that  the  financiers  never  wanted 
war,  that  if  (which  I  beg  to  doubt)  diplomacy 
conducted  in  their  interests  produced  the  war, 
that  was  because  diplomacy  misunderstood  and 
bungled  their  interests,  and  that  now  that  the 
war  has  happened,  the  financiers,  though  all 


Finance  and  War  97 

their  interests  urge  them  to  want  peace,  would 
never  be  parties  to  intrigues  for  a  peace  that  was 
premature  or  ill-judged. 

Perhaps  I  have  a  weakness  for  financiers, 
but  if  so  it  is  entitled  to  some  respect,  because 
it  is  based  on  closer  knowledge  of  them  than  is 
owned  by  most  of  their  critics.  For  years  it 
was  my  business  as  a  financial  journalist,  to  see 
them  day  by  day;  and  this  daily  intercourse 
with  financiers  has  taught  me  that  the  popular 
delusion  that  depicts  them  as  hard,  cruel, 
ruthless  men,  living  on  the  blood  and  sweat 
of  humanity,  and  engulfed  to  their  eyebrows 
in  their  own  sordid  interests,  is  about  as  absurd 
a  hallucination  as  the  stage  Irishman.  Finan- 
ciers are  quite  human  —  quiet,  mild,  good- 
natured  people  as  a  rule — many  of  them  spending 
much  time  and  trouble  on  good  works  in  their 
leisure  hours.  What  they  want  as  financiers  is 
plenty  of  good  business  and  as  little  as  possible 
disturbance  in  the  orderly  course  of  affairs. 
Such  a  cataclysm  as  the  present  war  could  only 
terrify  them,  especially  those  with  interests  in 
every  country  of  the  world.  When  war  comes, 
especially  such  a  war  as  this,  financing  in  its 


98  Benefits  of  Finance 

ordinary  and  most  profitable  sense  has  to  put 
up  its  shutters  in  the  warring  countries.  Nobody 
can  come  to  London  now  for  loans  except  the 
British,  or  French  Governments,  or,  occasion- 
ally, one  of  the  British  colonies.  Any  other 
borrower  is  warned  off  the  field  by  a  ruthless 
Committee  whose  leave  has  to  be  granted  before 
dealings  in  new  securities  are  allowed  on  the 
Stock  Exchange.  But  when  the  British  Govern- 
ment borrows,  there  are  no  profits  for  the  rank 
and  file  of  financiers.  No  underwriting  is 
necessary,  and  the  business  is  carried  out  by  the 
Bank  of  England.  The  commissions  earned  by 
brokers  are  smaller,  and  the  whole  financial 
organization  feels  that  this  is  no  time  for  profit- 
making,  but  for  hard  and  ill-paid  work,  with 
depleted  staffs,  to  help  the  great  task  of  financing 
a  great  war.  The  London  Stock  Exchange  is 
half  empty  and  nearly  idle.  It  is  tied  and  bound 
by  all  sorts  of  regulations  in  its  dealings,  and  its 
members  have  probably  suffered  as  severely 
from  the  war  as  any  section  of  the  community. 
The  first  interest  of  finance  is  unquestionably 
peace;  and  the  fact  that  the  London  financial 
district  is  nevertheless  full  of  fine,  full-flavoured 


A  Feeble  Influence  99 

patriotic  fervour  only  shows  that  it  is  ready  and 
eager  to  sink  its  interests  in  favour  of  those  of  its 
country. 

Every  knot  that  international  finance  ties 
between  one  country  and  another  makes  people 
in  those  two  countries  interested  in  their  mutual 
good  relations.  The  thing  is  so  obvious,  that, 
when  one  considers  the  number  of  these  knots 
that  have  been  tied  since  international  finance 
first  began  to  gather  capital  from  one  country's 
investors  and  place  it  at  the  disposal  of  others 
for  the  development  of  their  resources,  one  can 
only  marvel  that  the  course  of  international 
goodwill  has  not  made  further  progress.  The 
fact  that  it  is  still  a  remarkably  tender  plant, 
likely  to  be  crushed  and  withered  by  any  breath 
of  popular  prejudice,  is  rather  a  comforting 
evidence  of  the  slight  importance  that  mankind 
attaches  to  the  question  of  its  bread  and  butter. 
It  is  clear  that  a  purely  material  consideration, 
such  as  the  interests  of  international  finance,  and 
the  desire  of  those  who  have  invested  abroad  to 
receive  their  dividends,  weighs  very  little  in  the 
balance  when  the  nations  think  that  their  honour 
or  their  national  interests  are  at  stake.  Since 


ioo  Benefits  of  Finance 

the  gilded  cords  of  trade  and  finance  have  knit 
all  the  world  into  one  great  market,  the  proposi- 
tion that  war  does  not  pay  has  become  self- 
evident  to  any  one  who  will  give  the  question  a 
few  minutes'  thought.  International  finance  is 
a  peacemaker  every  time  it  sends  an  American 
dollar  or  a  British  pound  into  a  foreign  country. 
But  its  influence  as  a  peacemaker  is  astonishingly 
feeble  just  for  this  reason,  that  its  appeal  is  to  an 
interest  which  mankind  very  rightly  disregards 
whenever  it  feels  that  more  weighty  matters  are 
in  question.  The  fact  that  war  does  not  pay  is 
an  argument  that  is  listened  to  as  little  by  a 
nation  when  its  blood  is  up,  as  the  fact  that 
being  in  love  does  not  pay  would  be  heeded  by 
an  amorous  undergraduate. 

If,  then,  the  voice  of  international  finance  is 
so  feeble  when  it  is  raised  against  the  terrible 
scourge  of  war,  can  it  have  much  force  on  the 
rare  occasions  when  it  speaks  in  its  favour?  For 
there  is  no  inconsistency  with  the  view  that 
finance  is  a  peacemaker,  if  we  now  acknowledge 
that  finance  may  sometimes  ask  for  the  exertion 
of  force  on  its  behalf.  As  private  citizens  we  all 
of  us  want  to  live  at  peace  with  our  neighbours, 


The  Egyptian  Example  101 

but  if  one  of  them  steals  our  property  or  makes 
a  public  nuisance  of  himself,  we  sometimes  want 
to  invoke  the  aid  of  the  strong  arm  of  the  law 
in  dealing  with  him.  Consequently,  although 
it  cannot  be  true  that  finance  wanted  war  such 
as  the  one  now  raging  in  Europe,  it  cannot  be 
denied  that  wars  have  happened  in  the  past, 
which  have  been  furthered  by  British  financiers 
who  believed  that  they  suffered  wrongs  which 
only  war  could  put  right.  The  Egyptian  war  of 
1882  is  a  case  in  point,  and  the  South  African 
war  of  1899  is  another. 

In  Egypt  international  finance  had  lent 
money  to  a  potentate  ruling  an  economically 
backward  people,  without  taking  much  trouble 
to  consider  how  the  money  was  to  be  spent, 
or  whether  the  country  could  stand  the  charge 
on  its  revenues  that  the  loans  would  involve. 
The  fact  that  it  did  so  was  from  one  point  of 
view  a  blunder  and  from  another  a  crime,  but 
this  habit  of  committing  blunders  and  crimes, 
which  is  sometimes  indulged  in  by  finance  as  by 
all  other  forms  of  human  activity,  will  have  to 
be  dealt  with  in  our  next  chapter,  when  we  deal 
with  the  evils  of  international  finance.  The 


UNIVERSITY  OP  CALIFORNIA 
SANTA  BARBARA  COLLEGE  LIBRARY 


102  Benefits  of  Finance 

consequence  of  this  blunder  was  that  Egypt 
went  into  default,  and  England's  might  was 
used  on  behalf  of  the  bondholders  who  had 
made  a  bad  investment.  This  fact  has  been  put 
forward  by  Mr.  Brailsford,  in  his  very  interest- 
ing book  on  The  War  of  Steel  and  Gold,  and  by 
other  writers,  to  show  that  British  diplomacy  is 
the  tool  of  international  finance,  and  that  the 
forces  created  by  British  taxpayers  for  the 
defence  of  their  country's  honour  are  used  for 
the  sordid  purpose  of  wringing  interest  for  a  set 
of  financial  money-grubbers,  out  of  a  poor  and 
down-trodden  peasantry  overburdened  by  the 
exactions  and  extortions  of  their  rulers.  Mr. 
Brailsford,  of  course,  puts  his  case  much  better 
than  I  can,  in  any  brief  summary  of  his  views. 
He  has  earned  and  won  the  highest  respect  by 
his  power  as  a  brilliant  writer,  and  by  his  dis- 
interested and  consistent  championship  of  the 
cause  of  honesty  and  justice,  wherever  and 
whenever  he  thinks  it  to  be  in  danger.  Neverthe- 
less, in  this  matter  of  the  Egyptian  war  I  venture 
to  think  that  he  is  mistaking  the  tail  for  the  dog. 
Diplomacy,  I  fancy,  was  not  wagged  by  finance 
but  used  finance  as  a  very  opportune  pretext. 


The  Egyptian  Example  103 

If  Egypt  had  been  Brazil,  it  is  not  very  likely 
that  the  British  fleet  would  have  shelled  Rio  de 
Janeiro.  The  bondholders  would  have  been 
reminded  of  the  sound  doctrine,  caveat  emptor, 
which  signifies  that  those  who  make  a  bad  bar- 
gain have  only  themselves  to  blame,  and  must 
pocket  their  loss  with  the  best  grace  that  they 
can  muster.  As  it  was,  Egypt  had  long  ago  been 
marked  out  as  a  place  that  England  wanted, 
because  of  its  vitally  important  position  on  the 
way  to  India.  Kinglake,  the  historian,  writing 
some  three-quarters  of  a  century  ago,  long  before 
the  Suez  Canal  was  built,  prophesied  that  Egypt 
would  some  day  be  British.  In  Chapter  XX  of 
Eothen  comes  this  well-known  passage  on  the 
Sphynx  (he  spelt  it  thus) : 

"And  we,  we  shall  die,  and  Islam  will  wither 
away,  and  the  Englishman,  leaning  far  over  to 
hold  his  loved  India,  will  plant  a  firm  foot  on 
the  banks  of  the  Nile,  and  sit  in  the  seats  of 
the  Faithful,  and  still  that  sleepless  rock  will 
lie  watching,  and  watching  the  works  of  the 
new,  busy  race,  with  those  same  sad,  earnest 
eyes,  and  the  same  tranquil  mien  everlasting." 

After  the  building  of  the  Canal,  the  command 
of  this  short-cut  to  India  made  Egypt  still  more 


104  Benefits  of  Finance 

important.  England  bought  shares  in  the  Canal, 
so  using  finance  as  a  means  to  a  political  object ; 
and  it  did  so  still  more  effectively  when  it  used 
the  Egyptian  default  and  the  claims  of  English 
bondholders  as  an  excuse  for  taking  its  seat  in 
Egypt  and  sitting  there  ever  since.  The  bond- 
holders were  certainly  benefited,  but  it  is  my 
belief  that  they  might  have  whistled  for  their 
money  until  the  crack  of  doom  if  it  had  not  been 
that  their  claims  chimed  in  with  Imperial  policy. 
It  may  have  been  wicked  of  England  to  take 
Egypt,  but  if  so  let  us  lay  the  blame  on  the  right 
doorstep  and  not  abuse  the  poor  bondholder  and 
financier  who  only  wanted  their  money  and  were 
used  as  a  stalking  horse  by  the  Machiavellis  of 
Downing  Street.  Mr.  Brailsford's  own  account 
of  the  matter,  indeed,  shows  very  clearly  that 
policy,  and  not  finance,  ruled  the  whole  trans- 
action. 

In  South  Africa  there  was  no  question  of 
default,  or  of  suffering  bondholders.  There 
was  a  highly  prosperous  mining  industry  in  a 
country  that  had  formerly  belonged  to  the 
British  Empire,  and  had  been  given  back  to  its 
Dutch  inhabitants  under  circumstances  which 


The  Transvaal  Example  105 

the  majority  of  people  in  England  regarded  as 
humiliating.  On  this  occasion  even  the  pretext 
was  political.  It  may  have  been  that  the  Eng- 
lish mine-owners  thought  they  could  earn  better 
profits  under  the  British  flag  than  under  the  rule 
of  Mr.  Kruger,  though  I  am  inclined  to  believe 
that  even  in  their  case  their  incentive  was 
chiefly  a  patriotic  desire  to  repaint  in  red  that 
part  of  the  map  in  which  they  carried  on  their 
business.  Certainly  their  grievance,  as  it  was 
put  before  Englishmen  at  home,  was  frankly  and 
purely  political.  They  said  they  wanted  a  vote 
and  that  Mr.  Kruger  would  not  give  them  one. 
That  acute  political  thinker,  Mr.  Dooley  of 
Chicago,  pointed  out  at  the  time  that  if  Mr. 
Kruger  "had  spint  his  life  in  a  rale  raypublic 
where  they  burn  gas, "  he  would  have  given  them 
the  votes,  but  done  the  counting  himself.  But 
Mr.  Kruger  did  not  adopt  this  cynical  expedient, 
and  English  public  opinion,  though  a  consider- 
able minority  detested  the  war,  endorsed  the 
determination  of  the  Government  to  restore  the 
disputed  British  suzerainty  over  the  Transvaal 
into  actual  sovereignty.  Subsequent  events, 
largely  owing  to  the  ample  self-government 


106  Benefits  of  Finance 

given  to  the  Transvaal  immediately  after  its 
conquest,  have  shown  that  the  war  did  more 
good  than  harm;  and  the  splendid  defeat  of 
the  Germans  by  the  South  African  forces  under 
General  Botha — England's  most  skilful  oppo- 
nent fifteen  years  ago — has,  we  may  hope,  wiped 
out  all  traces  of  the  former  conflict.  But  what 
we  are  now  concerned  with  is  the  fact,  which  will 
be  endorsed  by  all  Englishmen  whose  memory 
goes  back  to  those  days,  that  the  South  African 
war,  though  instigated  and  furthered  by  financial 
interests,  would  never  have  happened  if  public 
opinion  had  not  been  in  favour  of  it  on  grounds 
which  were  quite  other  than  financial — the 
desire  to  bring  back  the  Transvaal  into  the 
British  Empire  and  to  wipe  out  the  memory  of 
the  surrender  after  Majuba,  and  humanitarian 
feeling  which  believed,  rightly  or  wrongly,  that 
the  natives  would  be  treated  better  under  British 
rule.  These  may  or  may  not  have  been  good 
reasons  for  going  to  war,  but  at  least  they  were 
not  financial. 

Summing  up  the  results  of  this  rather  dis- 
cursive chapter  we  see  that  the  chief  benefit 
conferred  on  mankind  by  international  finance 


Finance  and  Diplomacy  107 

is  a  quickening  of  the  pace  at  which  the  wealth 
of  the  world  is  increased  and  multiplied,  by 
using  the  capital  saved  by  old  countries  for 
fostering  the  productive  power  of  new  ones. 
This  is  surely  something  solid  on  the  credit 
side  of  the  balance  sheet,  though  it  would  be  a 
good  deal  more  so  if  mankind  had  made  better 
progress  with  the  much  more  difficult  problem 
of  using  and  distributing  its  wealth.  If  the 
rapid  increase  of  wealth  merely  means  that 
honest  citizens,  who  find  it  as  hard  as  ever  to 
earn  a  living,  are  to  be  splashed  with  more  mud 
from  more  motor-cars  full  of  more  road  hogs, 
then  there  is  little  wonder  if  the  results  of  inter- 
national finance  produce  a  feeling  of  disillusion- 
ment. But  at  least  it  must  be  admitted  that  the 
stuff  has  to  be  grown  and  made  before  it  can 
be  shared,  and  that  a  great  advance  has  been 
made  even  in  the  general  distribution  of  comfort. 
If  we  still  find  it  hard  to  make  a  living,  that  is 
partly  because  we  have  very  considerably  ex- 
panded, during  the  course  of  the  last  generation 
or  two,  our  notion  of  what  we  mean  by  a  living. 
As  to  the  sinister  influence  alleged  to  be 
wielded  by  international  finance  in  the  councils 


io8  Benefits  of  Finance 

of  diplomacy,  it  has  been  shown  that  war  on  a 
great  scale  terrifies  finance  and  inflicts  great 
distress  on  it.  To  suppose,  therefore,  that 
finance  is  interested  in  the  promotion  of  such 
wars  is  to  suppose  that  it  is  a  power  shortsighted 
to  the  point  of  imbecility.  In  the  case  of  wars 
which  finance  is  believed  with  some  truth  to 
have  helped  to  instigate,  we  have  seen  that  it 
could  not  have  done  so  if  other  influences  had 
not  helped  it.  In  short,  both  the  occurrence  of 
the  present  war,  and  the  circumstances  that 
led  up  to  war  in  Egypt  and  South  Africa,  have 
shown  how  little  power  finance  wields  in  the 
realm  of  foreign  politics.  In  the  London  financial 
district  if  one  suggests  that  the  British  Foreign 
Office  is  swayed  by  financial  influences  one  is 
met  by  incredulous  mockery,  probably  accom- 
panied by  assertions  that  the  Foreign  Office  is, 
in  fact,  neglectful,  to  a  fault,  of  British  financial 
interests  abroad,  and  that  when  it  does,  as  in 
China,  interfere  with  financial  matters,  it  is  apt 
to  tie  the  hands  of  finance,  in  order  to  further 
what  it  believes  to  be  the  political  interests  of 
the  country.  The  formation  of  the  Six  Power 
Group  in  China  meant  that  the  financial  strength 


Finance  in  Germany  109 

of  England  and  France  had  to  be  shared,  for 
political  reasons,  with  Powers  which  had,  on 
purely  financial  grounds,  no  claim  whatever  to 
participate  in  the  business  of  furnishing  capital 
to  China.  The  introduction  to  the  1898  edition 
of  Fenn  on  the  Funds  (a  financial  book  of 
reference  published  in  London)  expresses  the 
view  that  the  British  Government  is  ready  to 
protect  British  traders  abroad,  but  only  helps 
investors  when  it  suits  it  to  do  so.  "  If , "  it  says, 

"a  barbarian  potentate's  subjects  rob  a  British 
trader  we  never  hesitate  to  insist  upon  the 
payment  of  liberal  compensation,  which  we 
enforce  if  necessary  by  a  'punitive  expedition,' 
but  if  a  civilized  Government  robs  a  large  number 
of  British  investors,  the  Government  does  not 
even,  so  far  as  we  know,  enlist  the  help  of  its 
diplomatic  service.  Only  when,  as  in  the  case  of 
Egypt,  there  are  important  political  objects  in 
view,  does  the  State  protect  those  citizens  who 
are  creditors  of  foreign  nations.  One  or  two  other 
countries,  notably  Germany,  set  us  a  good 
example,  with  the  best  results  as  far  as  their 
investors  are  concerned." 

Germany  is  often  thus  taken  as  the  example  of 
the  State  which  gives  its  financiers  the  most  effi- 
cient backing  abroad;  but  even  in  Germany 


no  Benefits  of  Finance 

finance  is,  like  everything  else,  the  obedient  ser- 
vant of  the  military  and  political  authorities. 
For  several  years  before  the  present  war,  the 
financiers  of  Berlin  were  forbidden  to  engage  in 
money  lending  operations  abroad.  No  doubt  the 
Government  saw  that  the  present  war  was  com- 
ing, and  so  it  preferred  to  keep  German  money  at 
home.  It  is  true  that  Germany  once  shook  its 
mailed  fist  with  some  vigour  on  behalf  of  its 
financial  interest  when  it  made,  with  England, 
a  demonstration  against  Venezuela.  But  it  is  at 
least  possible  that  it  did  so  chiefly  with  a  view 
to  the  promotion  of  the  popularity  of  its  navy  at 
home,  and  to  making  it  easier  to  get  the  money 
for  its  upkeep  and  increase  from  the  taxpayers, 
already  oppressed  by  their  military  burden.  In 
Morocco,  questions  of  trade  and  finance  were  at 
the  back  of  the  quarrel,  but  it  would  not  have 
become  acute  if  it  had  not  been  for  the  expected 
political  consequences  that  were  feared  from  the 
financial  penetration  that  was  being  attempted; 
and  as  has  been  already  pointed  out,  the  finan- 
ciers are  generally  credited  with  having  per- 
suaded Germany  to  agree  to  a  settlement  on 
that  occasion. 


Finance  in  Germany  in 

In  short,  finance,  if  left  to  itself,  is  inter- 
national and  peace-loving.  Many  financiers  are 
at  the  same  time  ardent  patriots,  and  see  in 
their  efforts  to  enrich  themselves  and  their  own 
country  a  means  for  furthering  its  political 
greatness  and  diplomatic  prestige.  Man  is  a 
jumble  of  contradictory  crotchets,  and  it  would 
be  difficult  to  find  anywhere  a  financier  who  lives, 
as  they  are  all  commonly  supposed  to  do,  purely 
for  the  pleasure  of  amassing  wealth.  If  such  a 
being  could  be  discovered  he  would  probably 
be  a  lavish  subscriber  to  peace  societies,  and 
would  show  a  deep  mistrust  of  diplomatists  and 
politicians. 


CHAPTER  VI 

THE    EVILS    OF    INTERNATIONAL    FINANCE 

No  one  who  writes  of  the  evils  of  international 
finance  runs  any  risk  of  being  "gravelled  for 
lack  of  matter."  The  theme  is  one  that  has 
been  copiously  developed,  in  a  variety  of  keys 
by  all  sorts  and  conditions  of  composers.  Since 
Philip  the  Second  of  Spain  published  his  views 
on  "financiering  and  unhallowed  practices  with 
bills  of  exchange,"  and  illustrated  them  by 
repudiating  his  debts,  there  has  been  a  chorus  of 
opinion  singing  the  same  tune  with  variations, 
and  describing  the  financier  as  a  bloodsucker 
who  makes  nothing,  and  consumes  an  inordinate 
amount  of  the  good  things  that  are  made  by 
other  people. 

It  has  already  been  shown  that  capital,  saved 
by  thrifty  folk,  is  essential  to  industry  as  society 
is  at  present  built  and  worked ;  and  the  financiers 


112 


Prejudices  1 13 

are  the  people  who  see  to  the  management  of 
these  savings,  their  collection  into  the  great 
reservoir  of  the  money  market,  and  their  placing 
at  the  disposal  of  industry.  It  seems,  therefore, 
that,  though  not  immediately  concerned  with 
the  making  of  anything,  the  financiers  actually 
do  work  which  is  now  necessary  to  the  making 
of  almost  everything.  Railway  managers  do 
not  make  anything  that  can  be  touched  or  seen, 
but  the  power  to  move  things  from  the  place 
where  they  are  grown  or  made,  to  the  place 
where  they  are  eaten  or  otherwise  consumed  or 
enjoyed,  is  so  important  that  industry  could  not 
be  carried  on  on  its  present  scale  without  them; 
and  that  is  only  another  way  of  saying  that,  if  it 
had  not  been  for  the  railway  managers,  a  large 
number  of  us  who  at  present  do  our  best  to 
enjoy  life,  could  never  have  been  born.  Finan- 
ciers are,  if  possible,  even  more  necessary  to 
the  present  structure  of  industry  than  railway 
men.  If,  then,  there  is  this  general  prejudice 
against  people  who  turn  an  all  important  wheel 
in  the  machinery  of  modern  production,  it  must 
either  be  based  on  some  popular  delusion,  or  if 
there  is  any  truth  behind  it,  it  must  be  due  to  the 


H4      Evils  of  International  Finance 

fact  that  the  financiers  do  their  work  ill,  or 
charge  the  community  too  much  for  it,  or  both. 

Before  we  can  examine  this  interesting  prob- 
lem on  its  merits,  we  have  to  get  over  one 
nasty  puddle  that  lies  at  the  beginning  of  it. 
Much  of  the  prejudice  against  financiers  is 
based  on,  or  connected  with,  anti-Semitic  feeling, 
that  miserable  relic  of  medieval  barbarism.  No 
candid  examination  of  the  views  current  about 
finance  and  financiers  can  shirk  the  fact  that  the 
common  prejudice  against  Jews  is  at  the  back  of 
them;  and  the  absurdity  of  this  prejudice  is  a 
very  fair  measure  of  the  validity  of  other  current 
notions  on  the  subject  of  financiers.  The  Jews 
are,  chiefly,  and  in  general,  what  they  have  been 
made  by  the  alleged  Christianity  of  the  so-called 
Christians  among  whom  they  have  dwelt.  An 
obvious  example  of  their  treatment  in  the  good 
old  days  is  given  by  Antonio's  behaviour  to 
Shylock.  Antonio,  of  whom  another  character 
in  the  Merchant  of  Venice  says  that — 

"  A  kinder  gentleman  treads  not  the  earth," 

not  only  makes  no  attempt  to  deny  that  he  has 
spat  on  Shylock,  and  called  him  cut-throat  dog, 


Anti-Semitic  Prejudice  115 

but  remarks  that  he  is  quite  likely  to  do  so  again. 
Such  was  the  behaviour  towards  Jews  of  the 
princely  Venetian  merchant,  whom  Shakespeare 
was  portraying  as  a  model  of  all  the  virtues.* 
Compare  also,  for  a  more  modern  example, 
Kinglake  in  a  note  to  Chapter  V  of  Eothen. 

"The  Jews  of  Smyrna  are  poor,  and  having 
little  merchandize  of  their  own  to  dispose  of, 
they  are  sadly  importunate  in  offering  their 
services  as  intermediaries;  their  troublesome 
conduct  had  led  to  the  custom  of  beating  them 
in  the  open  streets.  It  is  usual  for  Europeans 
to  carry  long  sticks  with  them,  for  the  express 
purpose  of  keeping  .off  the  -chosen  people.  I 
always  felt  ashamed  to  strike  the  poor  fellows 
myself,  but  I  confess  to  the  amusement  with 
which  I  witnessed  the  observance  of  this  custom 
by  other  people." 

Originally,  as  we  see  from  the  Hebrew  scrip- 
tures, a  hardy  race  of  shepherds,  farmers,  and 
warriors,  they  were  forced  into  the  business  of 
finance  by  the  canonical  law  which  forbade 
Christians  to  lend  money  at  interest,  and  also 
by  the  persecution,  robbery,  and  risk  of  banish- 
ment to  which  Christian  prejudice  made  them 

*  Merchant  of  Venice,  i.  3. 


n6      Evils  of  International  Finance 

always  liable.  For  these  reasons  they  had  to 
have  their  belongings  in  a  form  in  which  they 
could  at  any  moment  be  concealed  from  robbers, 
or  packed  up  and  carried  off  if  their  owners 
suddenly  found  themselves  told  to  quit  their 
homes.  So  they  were  practically  compelled 
to  traffic  in  coins  and  precious  metals  and 
jewelry,  and  in  many  places  all  other  trades 
and  professions  were  expressly  forbidden  to  them. 
This  traffic  in  coins  and  metals  naturally  led  to 
the  business  of  money  lending  and  finance,  and  the 
centuries  of  practice,  imposed  on  them  by  Chris- 
tianity, have  given  them  a  skill  in  this  trade, 
which  is  now  the  envy  of  Christians  who  have 
in  the  meantime  found  out  that  there  is  nothing 
wicked  about  moneylending  when  it  is  honestly 
done.  At  the  same  time  these  centuries  of  perse- 
cution have  given  the  Jews  other  qualities  which 
we  have  more  reason  to  envy  than  their  skill  in 
finance,  such  as  their  strong  family  affection 
and  the  steadfastness  with  which  they  stand  by 
one  another  in  all  countries  of  the  world.  The 
fact  of  their  being  scattered  over  the  face  of  the 
earth  has  given  them  added  strength  since 
finance  became  international.  The  great  Jew 


Weakness  of  Finance  117 

houses  have  relations  and  connections  in  every 
business  centre,  and  so  their  power  has  been 
welded,  by  centuries  of  racial  prejudice,  into  a 
weapon  the  strength  of  which  it  is  easy  for 
popular  imagination  to  exaggerate.  Christen- 
dom forced  the  money  power  into  the  hands  of 
this  persecuted  race,  and  now  feels  sorry  when  it 
sees  that  in  an  ordered  and  civilized  society,  in 
which  it  is  no  longer  possible  to  roast  an  awk- 
ward creditor  alive,  money  power  is  a  formid- 
able force.  That  a  large  part  of  this  power 
is  in  the  hands  of  a  family  party,  scattered  over 
all  lands  in  which  finance  is  possible,  is  another 
reason  why,  as  I  have  already  shown,  interna- 
tional finance  works  for  peace.  The  fact  of 
the  existence  of  the  present  war,  however,  shows 
that  the  limits  of  its  power  are  soon  reached, 
at  times  when  the  nations  believe  that  their 
honour  and  safety  can  only  be  assured  by 
bloodshed. 

A  large  part  of  the  popular  prejudice  against 
financiers  may  thus  be  ascribed  to  anti-Semitic 
feeling.  We  are  still  like  the  sailor  who  was 
found  beating  a  Jew  as  a  protest  against  the 
Crucifixion,  and,  when  told  that  it  had  happened 


n8      Evils  of  International  Finance 

nearly  two  thousand  years  ago,  said  that  he  had 
only  heard  of  it  that  morning. 

But  when  we  have  purged  our  minds  of  this 
stupid  prejudice,  we  are  still  faced  by  the  fact 
that  international  finance  is  often  an  unclean 
business,  bad  both  for  the  borrower  and  for  the 
lender  and  profitable  only  to  a  horde  of  para- 
sites in  the  borrowing  country,  and  to  those  who 
handle  the  loan  in  the  lending  country,  and 
get  subscriptions  to  it  from  investors  who  are 
subsequently  sorry  that  they  put  their  eggs  into 
a  basket  with  no  bottom  to  it.  Under  ideal 
conditions  money  is  lent  abroad,  through  a 
first-rate  and  honourable  finance  house,  to  a 
country  which  makes  honest  use  of  it  in  de- 
veloping its  resources  and  increasing  its  power 
to  make  and  grow  things.  The  loan  is  taken 
out  from  the  lending  country  in  the  shape  of 
goods  and  services  required  for  the  equipment  of 
a  young  nation  or  colony,  and  the  interest  comes 
in  every  year  in  the  shape  of  food  and  raw 
material  that  feeds  the  lender  and  helps  her 
industry.  Such,  it  may  be  asserted  with  con- 
fidence, is  the  usual  course  of  events,  and  must 
have  been  so,  or  England,  the  great  finance- 


The  Honduras  Loans  119 

monger,  could  not  have  been  so  greatly  enriched 
by  her  moneylending  operations  abroad,  and  the 
productive  power  of  the  world  could  not  have 
grown  as  it  has,  under  the  top-dressing  that  her 
finance  and  trade  have  given  it.  But  though  it  is 
thus  clear  enough  that  the  business  must  have 
been  on  the  whole  honestly  and  soundly  worked, 
there  have  been  some  ugly  stains  on  its  past, 
and  its  recent  history  has  not  been  quite  free 
from  unsavoury  features. 

In  1875  public  opinion  was  so  deeply  stirred 
by  the  manner  in  which  English  investors  and 
borrowing  states  had  suffered  from  the  system 
by  which  the  business  of  international  finance 
was  handled,  that  a  Select  Committee  of  the 
House  of  Commons  was  "appointed  to  inquire 
into  the  circumstances  attending  the  making 
of  contracts  for  Loans  with  certain  Foreign 
States  and  also  the  causes  which  have  led  to 
the  non-payment  of  the  principal  moneys  and 
interest  due  in  respect  of  such  loans."  Its  report 
is  a  very  interesting  document,  well  worth  the 
attention  of  those  interested  in  the  vagaries  of 
human  folly.  It  will  astound  the  reader  by 
reason  of  the  wickedness  of  the  waste  of  good 


120      Evils  of  International  Finance 

capital  involved,  and  at  the  same  time  it  is  a 
very  pleasant  proof  of  the  progress  that  has 
been  made  in  finance  during  the  last  half -century. 
It  is  almost  incredible  that  such  things  should 
have  happened  so  lately.  It  is  quite  impossible 
that  they  could  happen  now. 

In  1867  the  Republic  of  Honduras  had  been 
for  forty  years  in  default  on  its  portion,  amount- 
ing to  £27,200,  of  a  loan  issued  in  London  in 
1825,  for  the  Federal  States  of  Central  America. 

Nevertheless  it  contracted  with  Messrs  .^B 

and  G for  a  loan  of  £1,000,000  to  be  issued 

in  Paris  and  London.  The  loan  was  to  be 
secured  on  a  railway,  to  be  built,  or  begun,  out 
of  its  proceeds,  and  by  a  first  mortgage  on  all  the 
domains  and  forests  of  the  State.  The  Govern- 
ment undertook  to  pay  £140,000  annually  for 
fifteen  years,  to  meet  interest  on  and  redemption 
of  the  loan.  As  it  had  been  forty  years  in 
default  on  a  loan  which  only  involved  a  charge 
of  £1632,  it  is  hard  to  imagine  how  the  State 
could  have  entered  into  such  a  liability,  or  how 
any  issuing  house  could  have  had  the  temerity  to 
put  it  before  the  public. 

The  public  was  the  only  party  to  the  proceed- 


The  Honduras  Loans  121 

ings  which  showed  any  sense.    Don  C G , 

representative  of  the  Honduras  Government  in 
London,  relates  in  the  record  of  these  events 
that  he  put  before  the  Committee,  that  "the 
First  Honduras  Loan  in  spite  of  all  the  advan- 
tages which  it  offered  to  subscribers"  [issue 
price,  80,  interest  10  per  cent.,  sinking  fund  of  3 
per  cent,  which  would  redeem  the  whole  loan 
at  par  within  17  years]  "and  the  high  respect- 
ability of  the  house  which  managed  the  opera- 
tion, was  received  by  the  public  with  perfect 
indifference,  with  profound  contempt;  and  ac- 
cording to  the  deficient  and  vague  information 
which  reached  the  Legation,  there  were  hardly 
any  other  subscriptions  than  one  of  about 

£10,000  made  by  the  firm  of  B itself." 

Don  G ,  however,  seems  to  have  slightly 

exaggerated  the  wisdom  of  the  public;  in  any 
case  the  Committee  found  that  by  June  30, 
1868,  by  some  means  £48,000  of  the  loan  was 
held  by  the  public,  and  £952,000  was  in  posses- 
sion of  the  representatives  of  the  Honduras 
Government.  On  that  day  a  Mr.  L  *  under- 
took to  take  over  the  Government's  holding  at 
£68  I2s.  per  bond,  and  pay  current  interest.  A 


122      Evils  of  International  Finance 

market  was  made,  brokers  were  prevailed  on  to 
interest  their  friends  in  the  security,  and  in  two 
years'  time  the  bonds  were  disposed  of.  The 
quotation  was  skilfully  kept  above  the  issue  price 
and  in  November,  1868,  it  reached  94. 

The  story  of  this  loan  is  complicated  by  the 
fact  that  half  of  it  was  at  the  time  alleged  to 
have  been  placed  in  Paris,  but  it  appears,  as 
far  as  one  can  disentangle  fact  from  the  twisted 
skein  of  the  report,  that  the  Paris  placing  must 
have  resulted  much  as  did  the  first  effort  made 
in  London,  and  that  practically  the  whole  of  the 
bonds  there  issued  came  back  into  the  hands 
of  the  representatives  of  Honduras. 

At  the  end  of  the  proceedings  the  whole 
amount  of  the  loan  seemed  to  have  been  disposed 
of  in  London,  £631,000  having  been  sold  to  Mr. 

L and  passed  on  by  him  by  the  means 

described  above,  £200,000  having  been  issued 
to  railway  contractors,  £10,800  having  been 
"drawn  before  issue  and  cancelled,"  while 
£49,500  was  "issued  in  exchange  for  scrip," 
and  £108,500  was  taken  on  account  of  com- 
mission and  expenses. 

The  actual  cash  received  on  account  of  this 


The  Honduras  Loans  123 

loan  appears,  though  the  Committee's  figures 
are  difficult  to  follow,  to  have  come  to  just  over 
half  a  million.  Out  of  the  half  million  £16,850 
went  in  cash  commission,  and  £106,000  in 
interest  and  sinking  fund,  leaving  about  £380,000 
for  the  railway  contractors  and  the  Government. 
On  this  loan  the  Committee  observes  that  the 
commission  paid,  of  £108,500  bonds,  and 
£16,850  in  cash,  was  "greatly  in  excess  of  what 
is  usually  charged  by  contractors  for  loans." 

So  far  it  was  only  a  case  of  a  thoroughly 
speculative  transaction  carried  through  by  means 
of  the  usual  accompaniments.  A  defaulting 
State  believed  to  be  possessed  of  great  potential 
wealth,  thought,  or  was  induced  to  think,  that 
by  building  a  railway  it  could  tap  that  wealth. 
The  whole  thing  was  a  pure  possibility.  If  the 
loan  had  been  successfully  placed  at  the  issue 
price  it  would  have  sufficed  to  build  the  first 
section  (fifty-three  miles)  of  railway,  and  to 
leave  something  over  for  work  in  the  mahogany 
forests.  It  is  barely  possible  that  in  time  the 
railway  might  have  enabled  the  Government  to 
produce  enough  stuff  out  of  its  forests  to  meet 
the  charges  of  the  loan.  But  the  possibility 


124      Evils  of  International  Finance 

was  so  remote  that  the  terms  offered  had  to  be 
so  liberal  that  they  frightened  the  public,  which 
happened  to  be  in  a  sensible  mood,  until  it  was 
induced  to  buy  by  the  creation  of  a  market  on 
the  Stock  Exchange;  the  employment  of  inter- 
mediaries on  disastrous  terms,  and  finally  default 
as  soon  as  the  loan  charge  could  no  longer  be 
paid  out  of  the  proceeds  of  the  loan,  completed 
the  tale. 

In  May,  1869,  the  Minister  for  Honduras  in 

Paris,  M.  H ,  "took  steps"  to  issue  a  loan  for 

62,250,000  francs,  or  £2,490,000.  Out  of  it  a 
small  sum  (about  £62,000)  was  paid  to  the  rail- 
way contractors  in  London,  but  little  of  it  seems 
to  have  been  genuinely  placed,  since,  when  the 
Franco-German  war  broke  out  in  July,  1870, 

M.  H sent  2,500,000  francs  in  cash  (£100,- 

ooo),  and  39,000,000  francs  in  bonds,  to  Messrs. 

B and  G in  London.     Messrs.  B • 

and  others  made  an  agreement  with   Mr.   C. 

L ,  presumably  the  gentleman  who  had  taken 

over  and  dealt  with  the  unplaced  balance  of  the 
First  London  Loan.  By  its  terms  the  net 
price  to  be  paid  by  him  for  each  300  francs 
(£12)  bond  issued  originally  at  225  francs  (£9)1 


The  Honduras  Loans  125 

was  124  francs  (not  quite  £5).  He  succeeded 
in  selling  bonds  enough  to  realize  £408,460,  and 

he,  together  with  Messrs.   B and  G , 

received  £51,852  in  commission  for  so  doing. 

In  the  spring  of  1870,  the  Honduras  Govern- 
ment, still  hankering  after  its  railway  and  the 
wealth  that  it  was  to  open  up,  determined  to 
try  again  with  another  loan.  Something  had 
to  be  done  to  encourage  investors  to  take  it. 
A  few  days  before  the  prospectus  appeared,  a 
statement  was  published  in  a  London  news- 
paper to  the  effect  that  two  ships  had  arrived 
in  the  West  India  Docks  from  Truxillo  (Hon- 
duras) with  cargoes  of  mahogany  and  fustic 

consigned   to    Messrs.    B and    G on 

account  of  the  Honduras  Railway  Loan,  and  that 
two  others  were  loading  at  Truxillo  with  similar 
cargoes  on  the  same  account.  These  cargoes 
had  not  been  cut  by  the  Honduras  Government. 
It  had  bought  them  from  timber  merchants,  and 
they  were  found  to  be  of  most  inferior  quality. 
In  the  opinion  of  the  Committee  "the  purchase 
of  these  cargoes  and  the  announcement  of  their 
arrival  in  the  form  above  referred  to,  were  in- 
tended to  induce,  and  did  induce,  the  public  to 


126      Evils  of  International  Finance 

believe  that  the  hypothecated  forests  were 
providing  means  for  paying  the  interest  upon 
the  loan." 

With  the  help  of  this  fraud,  and  with  a  free 
and  extensive  market  made  on  the  Stock 
Exchange,  the  1870  Honduras  10  per  cent,  loan 
for  £2,500,000  nominal  was  successfully  issued 
at  80.  It  also  had  a  sinking  fund  of  3  per  cent., 
which  was  to  pay  it  off  in  fifteen  years.  Mr. 

L again   handled    the    operation,    having 

taken  over  the  contract  from   Messrs.  B 

and  G .     But  the  success  of  the  issue  was 

more  than  hollow.     It  was  empty.     For  Mr. 

L ,  in  the  process  of  making  the  market  to 

promote  it,  had  bought  nearly  the  whole  loan. 
Applicants  had  evidently  sold  nearly  as  fast  as 
they  applied;  for  on  the  I5th  December,  when 
the  last  instalment  was  to  be  paid,  less  than 
£200,000  bonds  remained  in  the  hands  of  the 
public.  Nevertheless  by  October,  1872,  nearly 
the  whole  of  the  loan  had  been  somehow  dis- 
posed of  to  investors  or  speculators.  One  of  the 
means  taken  to  stimulate  the  demand  for  them 
was  the  announcement  of  extra  drawings  of 
bonds  at  par,  over  and  above  the  operation  of 


The  Honduras  Loans  127 

the  3  per  cent,  sinking  fund,  provided  by  the 
prospectus. 

There  is  no  need  to  linger  over  the  compli- 
cated details  of  this  sordid  story.  The  Com- 
mittee's report  sums  up,  as  follows,  the  net 
results  of  the  1869  and  1870  loans  of  Honduras: 

"In  tracing  the  disposal  of  the  proceeds  of 
the  1869  and  1870  loans,  it  must  be  remembered 
that  your  Committee  had  no  evidence  before 
them  relating  to  the  funds  resulting  from  three- 
fifths  of  the  loan  of  1869;  only  two-fifths  of  the 
loan  was  realized  in  this  country,  the  remainder 
was  disposed  of  in  Paris  before  August,  1870, 
and  no  account  of  the  application  of  the  funds 
resulting  from  such  portion  of  the  loan  could 
be  obtained. 

"The  two-fifths  of  the  1869  loan,  and  the 
whole  of  the  loan  of  1870,  produced  net  £2,051,- 
511;  out  of  this  sum  only  £145,254  has  been 
paid  to  the  railway  contractors;  a  sum  of  £923,- 
184  would  have  been  sufficient  to  discharge  the 
interest  and  sinking  fund  in  respect  of  the  issued 
bonds  of  the  three  loans,  yet  the  trustees  .  .  . 

paid  to  Mr.  L £  1,339,752  or  £416,568 

beyond  the  sum  so  required  to  be  paid  upon  the 
issued  bonds  of  the  loans. 

"There  was  paid  to  him  for  commissions 
(apart  from  expenses)  on  the  three  loans,  out  of 
the  above  proceeds,  the  sum  of  £216,852.  He 
also  received  out  of  the  same  proceeds  £41,090, 


128      Evils  of  International  Finance 

being  the  difference  between  £370,000  cash 
paid  to  him  by  the  trustees  and  £328,910  scrip 
returned  by  him  to  them.  This  £41,090  prob- 
ably represents  the  premiums  paid  on  the 
purchase  of  the  scrip  before  or  immediately 
after  the  allotment  of  the  loan,  and  was  cer- 
tainly a  misapplication  of  the  proceeds  of  the 
loan. 

"Mr.  L was  also  paid,  out  of  these 

proceeds,  a  further  sum  of  £57,318,  nearly  the 
whole  of  which  seems  to  be  a  payment  in  dis- 
charge of  an  allowance  of  £8  per  bond  in  respect 
of  the  dealings  in  the  1867  loan.  ...  In 
addition  ...  it  will  be  remembered  that  Mr. 

L received  £50,000  'to  maintain  the  credit 

of  Honduras.' 

"He  also  on  the  i8th  of  June,  1872,  obtained 
£I73»57°  by  delivering  to  the  trustees  .  .  . 
5042  bonds  of  the  1870  loan,  at  £75  per  bond  and 
33,000  bonds  of  the  1869  loan  at  104  francs  per 
bond,  and  retaking  them  at  the  same  time  from 
the  trustees  at  £50  and  140  francs  per  bond 

respectively.  Mr.  L had  contracted  to 

pay  for  these  bonds  and  they  had  been  issued 
to  him  at  the  prices  of  £75  and  104  francs  re- 
spectively, and  the  remission  in  the  price  there- 
fore amounted  to  a  gift  to  him  of  £173,570  .  .  . 
out  of  this  portion  of  the  loan  of  1869,  and  the 

loan  of  1870,  Mr.  L has  received  in  cash,  or 

by  the  remission  of  his  contracts,  £955,398." 

It  is  little  wonder  that  Honduras  has  been 
in  default  on  these  loans  ever  since.  In  its 


The  Honduras  Loans  129 

Report  the  Committee  commented  severely  on 

the  action  of  Don  C G ,  the  London 

representative  of  the  Republic.  "He  sanc- 
tioned," it  says,  "Stock  Exchange  dealings  and 
speculations  in  the  loans  which  no  Minister 
should  have  sanctioned.  He  was  a  party  to  the 
purchase  of  the  mahogany  cargoes,  and  permitted 
the  public  to  be  misled  by  the  announcements 
in  relation  to  them.  By  express  contract  he 
authorized  the  'additional  drawings.'  He 

assisted  Mr.  L to  appropriate  to  himself 

large  sums  out  of  the  proceeds  of  the  loans  to 
which  he  was  not  entitled."  Very  likely  he  had 
not  a  notion  as  to  what  the  whole  thing  meant, 
and  only  thought  that  he  was  doing  his  best  to 
finance  his  country  along  the  road  to  wealth. 
But  the  fact  remains  that  by  these  actions  he 
made  his  Government  a  party  to  the  proceedings 
that  were  so  unfortunate  for  it  and  so  ruinous 
to  the  holders  of  its  bonds. 

After  its  examination  of  these  and  other  less 
sensational  but  equally  disastrous  issues  the 
Committee  made  various  recommendations, 
chiefly  in  the  direction  of  greater  publicity  in 
prospectuses,  and  ended  by  expressing  their 


130      Evils  of  International  Finance 

conviction  that  "the  best  security  against  the 
recurrence  of  such  evils  as  they,  have  above 
described  will  be  found,  not  so  much  in  legisla- 
tive enactments,  as  in  the  enlightenment  of  the 
public  as  to  their  real  nature  and  origin." 

If  the  scandals  and  losses  involved  by  loan 
issues  were  always  on  this  Gargantuan  scale, 
there  would  be  little  difficulty  about  disposing 
of  them,  both  on  economic  and  moral  grounds, 
and  showing  that  there  is,  and  can  be,  only  one 
side  to  the  problem.  But  when  it  is  only  a 
question,  not  of  fraud  on  a  great  scale  but  of  a 
certain  amount  of  underhand  business,  such  as 
is  quite  usual  in  some  latitudes,  and  a  certain 
amount  of  doubt  as  to  the  use  that  is  likely  to 
be  made  by  the  borrower  of  the  money  placed 
at  its  disposal,  it  is  not  so  easy  to  feel  sure  about 
the  duty  of  an  issuing  house  in  handling  foreign 
loans.  At  a  point,  in  fact,  the  question  becomes 
full  of  subtleties  and  casuistical  difficulties. 
;  For  instance,  let  us  suppose  that  an  emissary 
of  the  Republic  of  Barataria  approaches  a 
London  issuing  house  and  intimates  that  it 
wants  a  loan  for  3  millions  sterling,  to  be  spent 
half  in  increasing  the  Republic's  navy,  and  half 


A  Doubtful  Case  131 

in  covering  a  deficit  in  its  Budget,  and  that  he, 
the  said  emissary,  has  full  power  to  treat  for  the 
loan,  and  that  a  commission  of  2  per  cent,  is  to 
be  paid  to  him  by  the  issuing  house,  which  can 
have  the  loan  at  a  price  that  will  easily  enable 
it  to  pay  this  commission.  That  is  to  say,  we 
will  suppose  that  the  Republic  will  take  85  for 
the  price  of  its  bonds,  which  are  to  carry  5  per 
cent,  interest,  to  be  secured  by  a  lien  on  the 
customs  receipts,  and  to  be  redeemed  in  thirty 
years'  time  by  a  cumulative  Sinking  Fund 
working  by  annual  drawings  at  par,  or  by 
purchase  in  the  market  if  the  bonds  can  be 
bought  below  par.  If  the  Republic's  existing 
5  per  cent,  bonds  stand,  let  us  say,  at  98  in  the 
market,  this  gives  the  issuing  house  a  good 
prospect  of  being  able  to  sell  the  new  ones  easily 
at  95,  and  so  it  has  a  10  per  cent,  margin  out  of 
which  to  pay  stamps,  underwriting  and  other 
expenses,  and  commission  to  the  intermediary 
who  brought  the  proposal,  and  to  keep  a  big 
profit  to  themselves.  From  the  point  of  view 
of  their  own  immediate  interest  there  is  every 
reason  why  they  should  close  with  the  bargain, 
especially  if  we  assume  that  the  Republic  is 


132      Evils  of  International  Finance 

fairly  rich  and  prosperous,  and  that  there  is 
little  fear  that  its  creditors  will  be  left  in  the 
lurch  by  default. 

From  the  point  of  view  of  national  interest 
there  is  also  much  to  be  said  for  concluding  the 
transaction.  We  may,  with  very  good  ground, 
assume  that  it  would  also  be  intimated  to  the 
issuing  house  that  a  group  of  Continental 
financiers  was  very  willing  to  take  the  business 
up,  that  it  had  only  been  offered  to  it  owing  to 
old  standing  relations  between  it  and  the 
Republic,  and  that,  if  it  did  not  wish  to  do  the 
business,  the  loan  would  readily  be  raised  in 
Paris  or  Berlin.  By  refusing,  the  London  firm 
would  thus  prevent  all  the  profit  made  by  the 
operation  from  coming  to  England  instead  of  to 
a  foreign  centre.  But  there  is  much  more 
behind.  For  we  have  seen  that  finance  and 
trade  go  hand-in-hand,  and  that  when  loan- 
houses  in  London  make  advances  to  foreign 
countries,  the  hives  of  industry  in  the  manu- 
facturing districts  are  likely  to  be  busy.  It  has 
not  been  usual  in  England  to  make  any  express 
stipulation  to  the  effect  that  the  money,  or  part 
of  it,  raised  by  a  loan  is  to  be  spent  in  the 


A  Doubtful  Case  133 

country,  but  it  is  clear  that  when  a  nation 
borrows  in  England  it  is  thereby  predisposed  to 
giving  orders  to  English  industry  for  goods  that 
it  proposes  to  buy.  And  even  if  it  does  not  do 
so,  the  mere  fact  that  England  promises,  by 
making  the  loan,  to  hand  over  so  much  money,  in 
effect  obliges  her  to  sell  goods  or  services  valued 
at  that  amount.  On  the  Continent,  this  stipu- 
lation is  usual.  So  that  the  issuing  house  would 
know  that,  if  they  make  the  loan,  it  is  likely  that 
English  shipbuilders  will  get  the  orders  on  which 
part  of  it  is  to  be  spent,  and  that  in  any  case 
English  industry  in  one  form  or  another  will  be 
drawn  on  to  supply  goods  or  services  to  some- 
body; whereas  if  they  refuse  the  business  it  is 
certain  that  the  industrial  work  involved  will  be 
lost  to  England. 

On  the  other  side  of  the  account  there  are 
plenty  of  good  reasons  against  the  business. 
In  the  first  place  the  terms  offered  are  so  onerous 
to  the  borrower  that  it  may  safely  be  said  that 
no  respectable  issuing  house  in  London  would 
look  at  them.  In  effect  the  Republic  would  be 
paying  nearly  6  per  cent,  on  the  money,  if  it 
sold  its  5  per  cent,  bonds  at  85,  and  the  state  of 


1^4      Evils  of  International  Finance 

its  credit,  as  expressed  by  the  price  of  its  bonds 
in  the  market,  would  not  justify  such  a  rate. 
The  profit  offered  to  the  issuing  house  is  too  big, 
and  the  commission  demanded  by  the  inter- 
mediary is  so  large  that  it  plainly  points  to  evil 
practices  in  Barataria.  It  means  that  interested 
parties  have  made  underhand  arrangements  with 
the  Finance  Minister,  and  that  the  Republic 
is  going  to  be  plundered,  not  in  the  fine  full- 
flavoured  style  that  ruled  in  earlier  generations, 
but  to  an  extent  that  makes  the  business  too 
disreputable  to  handle.  Any  honourable  English 
house  would  consider  that  the  terms  offered  to 
itself  and  the  conditions  proposed  by  the  emis- 
sary were  such  that  the  operation  was  suspicious, 
and  that  being  mixed  up  with  suspicious  business 
was  a  luxury  that  it  preferred  to  leave  alone. 

On  other  grounds  the  loan,  well  secured  as 
it  seems  to  be,  is  not  of  a  kind  to  be  encouraged. 
We  have  supposed  its  purpose  to  be,  firstly,  to 
meet  a  deficit  in  a  Budget,  and  secondly,  to 
pay  for  naval  expansion.  Neither  of  these 
objects  is  going  to  improve  the  financial  position 
of  the  Republic.  Covering  a  deficit  by  loan  is 
bad  finance  in  any  case,  but  especially  so  when 


Loans  and  Deficits 

the  loan  is  raised  abroad.  In  the  latter  c 
most  likely  that  the  borrowing  State  is  o^ 
running  the  constable,  by  importing  more  goods 
than  it  can  pay  for  out  of  current  production. 
:  If  it  imports  for  the  purpose  of  increasing  its 
productive  power  by  buying  such  things  as 
railway  material,  then  it  is  making  a  perfectly 
legitimate  use  of  its  credit,  as  long  as  the  money 
is  well  spent,  and  the  railways  are  honestly 
built,  with  a  prospect  of  opening  up  good  coun- 
try, and  are  not  put  into  the  wrong  place  for 
political  or  other  reasons.  But  if  this  were  so, 
the  money  would  not  be  wanted  to  balance  a 
Budget,  but  on  railway  capital  account.  When 
a  balance  has  to  be  filled  by  borrowing  it  can 
only  mean  that  the  State  has  spent  more  than 
its  revenue  from  taxes  permits,  and  that  it  is 
afraid  to  cut  down  its  expenses  by  retrenchment 
or  to  increase  its  revenue  by  taxing  more  highly. 
And  so  it  chooses  the  primrose  path  of  dalliance 
with  a  moneylender. 

As  to  naval  expenditure,  here  again  we  have 
bad  finance  writ  large  over  the  proposal.  It  is 
not  good  business  for  countries  to  borrow  in 
order  to  increase  their  armies  and  navies  in  time 


is  of  International  Finance 

2,  and  the  practice  is  especially  objec- 
when  the  loan  is  raised  abroad.  In 
time  of  war,  when  expenditure  has  to  be  so  great 
and  so  rapid,  that  the  taxpayers  could  not  be 
expected  to  have  it  all  taken  out  of  their  pockets 
by  the  tax-gatherer,  there  is  some  excuse  for 
borrowing  for  naval  and  military  needs;  though 
even  in  time  of  war,  if  we  could  imagine  an  ideal 
State,  with  every  citizen  truly  patriotic,  and 
properly  educated  in  economics  and  finance, 
and  with  wealth  so  fairly  distributed  and  taxa- 
tion so  fairly  imposed  that  there  would  be  no 
possibility  of  any  feeling  of  grievance  and  irrita- 
tion among  any  class  of  taxpayers,  it  would 
probably  decide  that  the  simplest  and  most 
honest  way  of  financing  war  is  to  do  so  wholly 
out  of  taxation.  In  time  of  peace,  borrowing  for 
expenditure  on  defence  simply  means  that  the 
cost  of  a  need  of  to-day  is  met  by  someone  who  is 
hired  to  meet  it,  by  a  promise  of  interest  and 
repayment,  the  provision  of  which  is  passed 

•»« 

on  to  the  citizens  of  to-morrow.  It  is  always 
urged,  of  course,  that  the  citizens  of  to-morrow 
are  as  deeply  interested  in  the  defence  of  the 
realm  that  they  are  to  inherit  as  those  of  to-day, 


Loans  for  Defence  137 

but  that  argument  ignores  the  obvious  fact  that 
to-morrow  will  bring  its  own  problems  of  defence 
with  it,  which  seem  likely  to  be  at  least  as  costly 
as  those  of  the  present  day. 

Another  objection  to  lending  economically 
backward  countries  money  to  be  invested  in 
ships,  is  that  we  thereby  encourage  them  to 
engage  in  shipbuilding  rivalry,  and  to  join  in  that 
race  for  aggressive  power  which  has  laid  so  sore  a 
burden  on  the  older  peoples.  The  business  is 
also  complicated  by  the  unpleasant  activities  of 
the  armament  firms  of  all  countries,  which  are 
said  to  expend  much  ingenuity  in  inducing  the 
Governments  of  the  backward  peoples  to  indulge 
in  the  luxury  of  battleships.  Here,  again,  there 
is  no  need  to  paint  too  lurid  a  picture.  The 
armament  firms  are  manufacturers  with  an 
article  to  sell,  which  is  important  to  the  existence 
of  any  nation  with  a  seaboard;  and  they  are 
entirely  justified  in  legitimate  endeavours  to 
push  their  wares.  The  fact  that  the  armament 
firms  of  England,  Germany,  and  France  had 
certain  interests  in  common,  is  often  used  as  a 
text  for  sermons  on  the  subject  of  the  unpatriotic 
cynicism  of  international  finance.  It  is  easy 


138      Evils  of  International  Finance 

to  paint  them  as  a  ring  of  cold-blooded  devils 
trying  to  stimulate  bloodthirsty  feeling  between 
the  nations  so  that  there  may  be  a  good  market 
for  weapons  of  destruction.  From  their  point 
of  view,  they  are  providers  of  engines  of  defence 
which  they  make,  in  the  first  place,  for  the  use 
of  their  own  country,  and  are  ready  to  supply 
also,  in  time  of  peace,  to  other  nations  in  order 
that  their  plant  may  be  kept  running,  and  the 
cost  of  production  may  be  kept  low.  This  is 
one  of  the  matters  on  which  public  opinion,  in 
countries  in  which  private  firms  make  profits 
out  of  armaments,  may  have  something  to  say 
when  the  war  is  over.  In  the  meantime  it  may 
be  noted  that  unsavoury  scandals  have  occasion- 
ally arisen  in  connection  with  the  placing  of 
battleship  orders,  and  that  this  is  another  reason 
why  a  loan  to  finance  them  is  likely  to  have  an 
unpleasant  flavour  in  the  nostrils  of  the  fastidious. 
But  if  we  admit  the  very  worst  that  the 
most  searching  critic  of  international  finance 
can  allege  against  the  proposal  that  we  imagine 
to  be  put  forward  by  the  Republic  of  Barataria 
— if  we  admit  that  a  loan  to  balance  a  deficit 
and  pay  for  ships  probably  implies  wastefulness, 


Economic  Morals  139 

corruption,  political  rottenness,  impecunious 
Chauvinism  and  all  the  rest  of  it,  the  question 
still  arises  whether  it  is  the  business  of  an  issuing 
house  to  refuse  the  chance  of  doing  good  business 
for  itself  and  for  the  money  market  in  which  it 
works,  because  it  has  reason  to  believe  that  the 
money  lent  will  not  be  well  spent.  In  the  case 
supposed,  we  have  seen  that  the  terms  offered 
and  the  commission  to  be  made  by  the  inter- 
mediary were  such  that  the  latter  would  have 
been  shown  the  door.  But  if  these  matters 
had  been  satisfactory,  ought  the  proposal  to 
have  been  rejected  because  the  loan  was  to  be 
raised  for  unproductive  purposes? 

In  other  words,  is  it  the  business  of  an  issuing 
house  to  take  care  of  the  economic  morals  of 
its  clients,  or  is  it  merely  concerned  to  see  that 
the  securities  which  it  offers  to  the  public  are 
well  secured?  In  ordinary  life,  and  in  the  rela- 
tions between  moneylender  and  borrower  at 
home,  no  such  question  could  be  asked.  If  I 
went  to  my  banker  and  asked  for  a  loan  and 
gave  him  security  that  he  thought  good  enough, 
it  would  not  occur  to  him  to  ask  what  I  was  going 
to  do  with  the  money — whether  I  was  going  to 


140      Evils  of  International  Finance 

use  it  in  a  way  that  would  increase  my  earning 
capacity,  or  on  building  myself  a  billiard  room 
and  a  conservatory,  or  on  a  visit  to  Monte  Carlo. 
He  would  only  be  concerned  with  making  sure 
that  any  of  his  depositors'  money  that  he  lent  to 
me  would  be  repaid  in  due  course,  and  the 
manner  in  which  I  used  or  abused  the  funds  lent 
to  me  would  be  a  question  in  which  I  only  was 
concerned.  If  it  is  the  business  of  an  inter- 
national finance  house  to  be  more  careful  about 
the  use  to  which  money  that  it  lends  on  behalf 
of  clients  is  put,  why  should  this  be  so? 

There  are  several  reasons.  First,  because  if 
the  borrower  does  not  see  fit  to  pay  interest  on 
the  loan  or  repay  it  when  it  falls  due,  there  is  no 
process  of  law  by  which  the  lender  can  recover. 
If  I  borrow  from  my  banker  and  then  default 
on  my  debt,  he  can  put  me  in  the  bankruptcy 
court,  and  sell  me  up.  Probably  he  will  have 
protected  himself  by  making  me  pledge  securities 
that  he  can  seize  if  I  do  not  pay,  a  safeguard 
which  cannot  be  had  in  the  case  of  international 
borrowing;  but  if  these  securities  are  found  to  be 
of  too  little  value  to  make  the  debt  good,  every- 
thing else  that  I  own  can  be  attached  by  him. 


An  Essential  Difference  141 

The  international  moneylender,  on  the  other 
hand,  if  his  debtor  defaults  may,  if  he  is  lucky, 
induce  his  Government  to  bring  diplomatic 
pressure  to  bear,  for  whatever  that  may  be  worth. 
If  there  is  a  political  purpose  to  be  served,  as  in 
Egypt,  he  may  even  find  himself  used  as  an 
excuse  for  armed  intervention,  in  the  course  of 
which  his  claims  will  be  supported,  and  made 
good.  In  many  cases,  however,  he  and  the 
bondholders  who  subscribed  to  his  issue  simply 
have  to  say  goodbye  to  their  money,  with  the 
best  grace  that  they  can  muster,  in  the  absence 
of  any  law  by  which  a  lender  can  recover  moneys 
advanced  to  a  sovereign  State.  With  this 
essential  difference  in  the  conditions  under  which 
a  banker  lends  his  depositors'  money  to  a  local 
customer,  and  those  under  which  an  international 
house  lends  its  clients'  money  to  a  borrowing 
country,  it  follows  that  the  responsible  party  in 
the  latter  case  ought  to  exercise  very  much  more 
care  to  see  that  the  money  is  well  spent. 

In  the  second  place,  the  customers  to  whom 
bankers,  in  economically  civilized  lands,  lend 
the  money  entrusted  to  them,  may  fairly  be 
presumed  to  know  something  about  the  use  and 


142      Evils  of  International  Finance 

abuse  of  money  and  to  be  able  to  take  care  of 
themselves.  If  they  borrow  money,  and  then 
waste  it  or  spend  it  in  riotous  living,  they  know 
that  they  will  presently  impoverish  themselves, 
and  that  they  will  be  the  sufferers.  But  in  the 
case  of  a  young  country,  with  all  its  financial 
experience  yet  unbought,  there  is  little  or  no 
reason  for  supposing  that  its  rulers  are  aware 
that  they  cannot  eat  their  cake  and  have  it. 
They  probably  think  that  by  borrowing  to  meet 
a  deficit  or  to  build  a  Dreadnought  they  are 
doing  something  quite  clever,  dipping  their 
hands  into  a  horn  of  plenty  that  a  kindly  Provi- 
dence has  designed  for  their  behoof,  and  that 
the  loan  will  somehow,  some  day,  get  itself  paid 
without  any  trouble  to  anybody.  Moreover,  if 
they  are  troubled  with  any  forebodings,  the 
voice  of  common  sense  is  likely  to  be  hushed  by 
the  reflection  that  they  personally  will  not  be 
the  sufferers,  but  the  great  body  of  taxpayers,  or 
in  the  case  of  actual  default,  the  deluded  bond- 
holders ;  and  that  in  any  case,  the  trouble  caused 
by  over-borrowing  and  bad  spending  is  not 
likely  to  come  to  a  head  for  some  years.  Its 
first  effect  is  a  flush  of  fictitious  prosperity  which 


The  Day  of  Reckoning  143 

makes  everybody  happy  and  enhances  the 
reputation  of  the  politicians  who  have  arranged 
it.  When,  years  after,  the  evil  seed  sown  has 
brought  to  light  its  crops  of  tares,  it  is  very 
unlikely  that  the  chain  of  cause  and  effect  will 
be  recognized  by  its  victims,  who  are  much  more 
likely  to  lay  the  bad  harvest  to  the  door  not  of 
the  bad  financier  who  sowed  it,  but  of  some 
innocent  and  perhaps  wholly  virtuous  successor, 
merely  because  it  was  during  his  term  of  office 
that  the  crop  was  garnered.  So  many  are  the 
inducements  offered  to  young  States,  with  ignor- 
ant or  evil  (or  both)  rulers  at  their  head,  to  abuse 
the  facilities  given  them  by  international  finance, 
that  there  is  all  the  more  reason  why  those  who 
hold  the  strings  of  its  purse  should  exercise  very 
great  caution  in  allowing  them  to  dip  into  it. 

There  is  yet  another  reason  why  the  attitude 
of  an  issuing  house,  to  a  borrowing  State,  should 
be  paternal  or  even  grandmotherly,  as  com- 
pared with  the  purely  business-like  attitude  of 
a  banker  to  a  local  borrower.  If  the  bank  makes 
a  bad  debt,  it  has  to  make  it  good  to  its  de- 
positors at  the  expense  of  its  shareholders.  It 
diminishes  the  amount  that  can  be  paid  in 


144      Evils  of  International  Finance 

dividends  and  so  the  bank  is  actually  out  of 
pocket.  The  international  financier  is  in  quite 
a  different  position.  If  he  arranges  a  loan  for 
Barataria,  he  takes  his  profit  on  the  transaction, 
sells  the  bonds  to  investors,  or  to  the  members  of 
his  syndicate  if  investors  do  not  like  it,  and  is, 
from  the  purely  business  point  of  view,  quit  of  the 
whole  operation,  except  for  the  (probably  small) 
number  of  bonds  that  may  be  left  in  his  hands,  if 
it  is  unsuccessful.  He  still  remains  responsible 
for  receiving  from  the  State,  and  paying  to  the 
bondholders,  the  sum  due  each  half  year  in 
interest,  and  for  seeing  to  the  redemption  of  the 
bonds  by  the  operation  of  the  Sinking  Fund,  if 
any.  But  if  anything  goes  wrong  with  the 
interest  or  Sinking  Fund  he  is  not  liable  to  the 
bondholders,  as  the  bank  is  liable  to  its  deposi- 
tors. They  have  got  their  bonds,  and  if  the 
bonds  are  in  default  they  have  made  a  bad 
debt  and  not  the  issuing  house,  except  in  so  far 
as  it  has  kept  any  of  them  in  its  own  hands 

But  this  absence  of  any  legal  liability  on  the 
part  of  the  issuing  house  imposes  on  it  a  very 
strong  moral  obligation,  which  is  fully  recognized 
by  the  best  of  them.  Just  because  the  bond- 


A  Moral  Obligation  145 

holders  have  no  right  of  action  against  it,  unless 
it  can  be  shown  that  it  issued  a  prospectus  con- 
taining incorrect  statements,  it  is  all  the  more 
bound  to  see  that  their  money  shall  not  be 
imperilled  by  any  action  of  its  own.  It  knows 
that  a  firm  with  a  good  reputation  as  an  inter- 
national finance  house  has  only  to  put  its  name 
to  an  issue,  and  a  large  number  of  investors,  who 
have  neither  the  education  nor  the  knowledge 
required  to  form  a  judgment  on  its  merits,  will 
subscribe  for  or  buy  the  bonds  on  the  strength 
of  the  name  of  the  issuing  house.  This  fact 
makes  it  an  obvious  duty  on  the  part  of  the 
latter  to  see  that  this  trust  is  deserved.  More- 
over, it  would  obviously  be  bad  business  on  its 
part  to  neglect  this  duty.  For  a  good  reputation 
as  an  issuing  house  takes  years  to  build  up,  and 
is  very  easily  shaken  by  any  mistake,  or  even 
by  any  accident,  which  could  not  have  been 
foreseen  but  yet  brings  a  loan  that  it  has  handled 
into  the  list  of  doubtful  payers.  Mr.  Brails- 
ford,  indeed,  asserts  that  it  may  be  to  the  ad- 
vantage of  bondholders  to  be  faced  by  default 
on  the  part  of  their  debtors.  It  may  be  so  in 
those  rare  cases  in  which  they  can  get  reparation 


146      Evils  of  International  Finance 

and  increased  security,  as  in  the  case  of  the 
British  seizure  of  Egypt.  But  in  nine  cases  out 
of  ten,  as  is  shown  by  the  plaintive  story  told 
by  the  yearly  reports  issued  in  London  by  the 
Council  of  Foreign  Bondholders,  default  means 
loss  and  a  shock  to  confidence,  even  if  only 
temporary,  and  is  generally  followed  by  a 
composition  involving  a  permanent  reduction  in 
debt  and  interest.  Investors  who  have  suffered 
these  unpleasantnesses  are  likely  to  remember 
them  for  many  a  long  year,  and  to  remember 
also  the  name  of  the  issuing  house  which  fathered 
the  loan  that  was  the  cause  of  the  trouble. 

There  are  thus  many  good  reasons  why  it 
is  the  business  of  a  careful  issuing  firm  to  see 
not  only  that  any  loan  that  it  offers  is  well 
secured,  but  also  that  it  is  to  be  spent  on  objects 
that  will  not  impair  the  productive  capacity  of 
the  borrowing  country  by  leading  it  down  the 
path  of  extravagance,  but  will  improve  it  by 
developing  its  resources  or  increasing  its  power 
to  move  its  products.  On  the  other  hand,  the 
temptation  to  undertake  bad  business  on  behalf 
of  an  importunate  borrower  is  great.  The 
profits  are  considerable  for  the  issuing  house  and 


Virtue's  Chilly  Reward  147 

for  all  their  followers.  The  indirect  advantages, 
in  the  way  of  trade  orders,  conferred  on  the 
lending  country,  are  also  profitable,  and  there  is 
always  the  fear  that  if  issuing  firms  take  too 
austere  a  view  of  what  is  good  business  for  them 
and  the  borrowing  countries,  the  more  accommo- 
dating loan-mongers  of  foreign  centres  may  reap 
the  benefit,  and  leave  them  with  empty  pockets 
and  the  somewhat  chilly  comfort  conferred  by 
the  consciousness  of  a  high  ideal  in  finance. 

One  of  the  most  unsatisfactory  features  about 
the  monetary  arrangements  of  society,  as  at 
present  constituted,  is  the  fact  that  the  reward 
of  effort  is  so  often  greater  with  every  degree  of 
evil  involved  by  the  effort.  And  to  some  extent 
this  is  true  in  finance.  Just  as  big  fortunes  are 
made  by  the  cheap-jacks  who  stuff  the  stomachs 
of  an  ignorant  public  with  patent  medicines, 
while  skilful  doctors  slave  patiently  for  a  pittance 
on  the  unsavoury  task  of  keeping  overfed  people 
in  health ;  just  as  Milton  got  £5  for  Paradise  Lost, 
while  certain  modern  novelists  are  rewarded 
with  thousands  of  dollars  for  writing  romances 
which  would  never  be  printed  in  a  really  edu- 
cated community;  so  in  finance  the  more  ques- 


148      Evils  of  International  Finance 

tionable — up  to  a  certain  point — be  the  security  to 
be  handled,  the  greater  are  the  profits  of  the  issu- 
ing house,  the  larger  the  commissions  of  the 
underwriters  and  brokers,  and  the  larger  are  the 
amounts  paid  to  the  newspapers  for  advertising. 
The  present  state  of  London's  financial  district 
is  a  good  example  of  the  truth  of  this  truism. 
As  has  already  been  observed,  that  part  of  the 
"City"  that  lives  on  handling  new  issues  has 
been  half  starved  since  the  war  began,  because 
its  activities  have  been  practically  confined  to 
loans  issued  by  the  British  Government.  These 
loans  have  been  huge  in  amount  but  there  has 
been  no  underwriting,  and  brokerages  are  cut 
to  the  bone.  Advertising  for  the  second  War 
Loan  was  on  a  great  scale,  but  in  proportion  to 
the  amount  subscribed  the  cost  of  it  was  prob- 
ably small,  according  to  the  ideals  that  ruled 
before  the  war.  A  British  Colonial  loan,  or  a 
first-class  American  railroad  bond,  almost  places 
itself  in  London,  and  the  profits  on  the  issue  to 
all  who  handle  it  are  proportionately  low.  The 
more  questionable  the  security,  the  more  it  has 
to  pay  for  its  footing,  and  the  higher  are  the 
profits  of  those  who  father  it  and  assist  the 


Bad  Finance,  Big  Profits  149 

process  of  delivery,  as  long,  that  is,  as  the  birth  is 
successfully  accomplished. 

If  there  is  failure,  partial  or  complete,  then 
the  task  of  holding  the  baby  is  longer  and  more 
uncomfortable,  the  more  puny  and  unattractive 
it  is.  If,  owing  to  some  accident  in  the  monetary 
atmosphere,  a  British  Colonial  loan  does  not 
go  off  well,  the  London  underwriters  who  find 
themselves  saddled  with  it,  can  easily  borrow 
on  it,  in  normal  times,  and  know  that  sooner  or 
later  trustees  and  other  real  investors  will  take 
it  off  their  hands.  But  if  it  is  an  issue  of  some 
minor  European  power,  or  of  some  not  too 
opulent  South  American  State,  that  is  coldly 
received  by  the  investing  public,  London  bankers 
will  want  a  big  margin  before  they  accept  it  as 
security  for  an  advance,  and  it  may  take  years 
to  find  a  home  for  it  in  the  strong  boxes  of  real 
investors,  and  then  perhaps  only  at  a  price  that 
will  leave  the  underwriters,  like  Sir  Andrew 
Aguecheek,  "a  foul  way  out."  There  is  thus  a 
logical  reason  for  the  higher  profits  attached  to 
the  more  questionable  issues,  and  this  reason  is 
found  in  the  greater  risk  attached,  if  failure 
should  ensue. 


150      Evils  of  International  Finance 

Thus  we  arrive  at  the  reply  to  those  who 
criticize  International  Finance  on  the  ground 
that  it  puts  too  big  profits  into  the  pockets  of 
those  who  handle  it.  If  the  profits  are  big,  it  is 
only  in  the  case  of  loan  issues  which  carry  with 
them  a  considerable  risk  to  the  reputation  of  the 
fathering  firm,  and  to  the  pockets  of  the  under- 
writers, and  involve  a  responsibility,  and  in  the 
case  of  default,  an  amount  of  wholly  unpaid  work 
and  anxiety  for  which  the  big  profits  made  on  the 
opening  proceedings  do  not  nearly  compensate. 
As  in  the  case  of  the  big  gains  made  by  patent 
pill  merchants,  and  bad  novelists,  it  is  the  public, 
which  is  so  fond  of  grumbling  because  other 
people  make  fortunes  out  of  it,  that  is  really 
responsible  for  their  doing  so,  by  reason  of  its 
own  greed  and  stupidity.  Because  it  will  not 
take  the  trouble  to  find  out  how  to  spend  or 
invest  its  money,  it  asks  those  who  are  clever 
enough  to  batten  on  its  foibles,  to  sell  it  bad 
stuff  and  bad  securities,  and  then  feels  hurt 
because  it  has  a  pain  in  its  inside,  or  a  worth- 
less bond  at  its  banker's,  while  the  producers 
thereof  are  founding  comfortable  fortunes.  If 
the  public  would  learn  the  A  B  C  of  investment, 


The  Public's  Responsibility        151 

and  also  learn  that  there  is  an  essential  difference 
between  investment  and  speculation,  that  they 
will  not  blend  easily  but  are  likely  to  spoil  one 
another  if  one  tries  to  mix  them,  then  the  whole 
business  of  loan  issuing  and  company  promotion 
would  be  on  a  sounder  basis,  with  less  risk  to 
those  who  handle  it,  and  less  temptation  to  them 
to  try  for  big  profits  out  of  bad  ventures.  But 
as  long  as 

"the  fool  multitude  that  choose  by  show" 

give  more  attention  to  the  size  of  an  advertise- 
ment than  to  the  merits  of  the  security  that  it 
offers,  the  profits  of  those  who  cater  for  its 
weaknesses  will  wax  fat. 

When  all  has  been  said  that  can  be  urged 
against  the  record  of  International  Finance,  the 
fact  remains  that  from  the  purely  material 
point  of  view  it  has  done  a  great  work  in  in- 
creasing the  wealth  of  mankind.  It  is  true' 
that  capital  has  often  been  wasted  by  being  lent 
to  corrupt  or  improvident  borrowers  for  pur- 
poses which  were  either  objectionable  in  them- 
selves, or  which  ought  to  have  been  financed, 
if  at  all,  out  of  current  revenue.  It  is  true,  also, 


152      Evils  of  International  Finance 

that  crimes  have  been  committed,  as  in  the  case 
of  the  Putumayo  horrors,  when  the  money  of 
English  shareholders  has  been  invested  in  the 
exploitation  of  helpless  natives,  accompanied  by 
circumstances  of  atrocious  barbarity.  Never- 
theless if  we  compare  the  record  of  finance  with 
that  of  religion  or  international  politics,  it 
stands  out  as  by  far  the  cleanest  of  the  influences 
that  have  worked  upon  the  mutual  relations  of 
the  various  groups  of  mankind.  International 
Finance  makes  a  series  of  bargains  between  one 
nation  and  another,  for  the  mutual  benefit  of 
each,  complicated  by  occasional  blunders,  some 
robbery,  and,  in  exceptional  cases,  horrible 
brutality.  Religion  has  stained  history  with 
the  most  ruthless  massacres  and  the  most 
unspeakable  ingenuity  in  torture,  all  devised 
for  the  glory  of  God  and  the  furtherance  of 
what  its  devotees  believed  to  be  His  word. 
International  politics  have  plunged  mankind 
into  a  series  of  bloody  and  destructive  wars, 
culminating  in  the  present  cataclysm.  Finance 
can  only  prosper  through  production;  its  efforts 
are  inevitably  failures,  if  they  do  not  tend  to  the 
growing  and  making  of  things,  or  the  production 


A  Comparison  153 

of  services,  that  are  wanted.  Destruction,  re- 
duced to  a  fine  art  and  embellished  by  the 
nicest  ingenuities  of  the  most  carefully  applied 
science,  is  the  weapon  of  international  politics. 

Note. — The  names  of  the  actors  in  the  Honduras  drama 
were  printed  in  blank  because  it  seemed  unfair  to 
do  otherwise,  in  revising  fifty  years'  old  scandals, 
as  an  example  of  what  International  Finance  can 
do  at  its  worst. 


CHAPTER  VII 

NATIONALISM  AND  FINANCE 

So  far  we  have  considered  the  working  of 
International  Finance  chiefly  from  the  point 
of  view  of  its  effects  upon  the  prosperity  and 
comfort  of  mankind  as  a  whole  and  on  England, 
which  has  hitherto  been  the  greatest  trader, 
carrier,  and  financier  of  the  world.  We  have 
seen  that  the  benefit  that  it  works  is  wrought 
chiefly  through  specialization — that  is,  through 
the  production  of  the  good  things  of  the  earth 
in  the  lands  best  fitted,  by  climate  or  otherwise, 
to  grow  and  make  them.  By  lending  money  to 
other  lands,  and  the  goods  and  service  that  they 
have  bought  with  it,  England  has  helped  them  to 
produce  things  for  her  to  consume,  or  to  work 
up  into  other  things  for  her  consumption  or 
that  of  other  peoples.  Thereby  she  has  enriched 

herself  and  the  rest  of  mankind.    But  the  ques- 

154 


Efficiency  or  Versatility?  155 

tion  still  arises  whether  this  process  is  one  that 
should  be  left  altogether  unchecked,  or  whether  it 
involves  evils  which  go  far  to  modify  its  benefits. 
In  other  words  is  it  a  good  thing  for  England, 
socially  and  politically,  to  enrich  herself  beyond 
a  certain  point  by  a  process  which  involves  her 
dependence  on  other  countries  for  food  and  raw 
material? 

Analogy  between  a  State  and  a  man  is  often 
useful,  if  not  pushed  too  far.  The  original  man 
in  a  primitive  state  is  always  assumed  to  have 
been  bound  to  find  or  make  everything  that  he 
wanted  by  his  own  exertions.  He  was  hut 
builder,  hunter,  cultivator,  bow-maker,  arrow- 
maker,  trapper,  fisherman,  boat-builder,  leather- 
dresser,  tailor,  fighter — a  wonderfully  versatile 
and  self-sufficient  person.  As  the  process  grew 
up  of  specialization,  and  the  exchange  of  goods 
and  services,  all  the  things  that  were  needed 
by  man  were  made  much  better  and  more 
cheaply,  but  this  was  only  brought  about  at  the 
expense  of  each  man's  versatility.  Nowadays 
we  can  all  of  us  do  something  very  much  better 
than  the  primitive  savage,  but  we  cannot  do 
everything  nearly  as  well.  We  have  become  little 


156  Nationalism  and  Finance 

insignificant  wheels  in  a  mighty  great  machine 
that  feeds  us  and  clothes  us  and  provides  us  with 
comforts  and  luxuries  of  which  he  could  never 
have  dreamt.  He  was  the  whole  of  his  machine, 
and  was  thereby  a  far  more  completely  developed 
man.  The  modern  millionaire,  in  spite  of  his 
enormous  indirect  power  over  the  forces  of 
nature,  is  a  puny  and  ineffective  being  by  the 
side  of  his  savage  ancestor,  in  the  matter  of 
power  to  take  care  of  himself  with  his  own  hands 
and  feet  and  eyes,  and  with  weapons  made  by  his 
own  ingenuity  and  cunning.  Moreover,  though 
in  the  case  of  the  millionaire  and  of  all  the  com- 
paratively well-to-do  classes  we  can  point  to 
great  intellectual  and  artistic  advantages,  and 
many  pleasant  amenities  of  life  now  enjoyed 
by  them,  thanks  to  the  process  of  specialization, 
these  advantages  can  only  be  enjoyed  to  the 
full  by  comparatively  few.  To  the  majority 
specialization  has  brought  a  life  of  mechanical 
and  monotonous  toil,  with  little  or  none  of  the 
pride  in  a  job  well  done,  such  as  was  enjoyed 
by  the  savage  when  he  had  made  his  bow  or 
caught  his  fish ;  those  who  work  all  day  on  some 
minute  process  necessary,  among  many  others, 


Drawbacks  of  Specialization         157 

to  the  turning  out  of  a  pin,  can  never  feel  the 
full  joy  of  achievement  such  as  is  gained  by  a 
man  who  has  made  the  whole  of  anything. 
Pins  are  made  much  faster,  but  some  of  the 
men  who  make  them  remain  machines,  and  never 
become  men  at  all  in  the  real  sense  of  the  word- 
And  when  at  the  same  time  the  circumstances  of 
their  lives,  apart  from  their  work,  are  all  that 
they  should  not  be — bad  food,  bad  clothes,  bad 
education,  bad  houses,  foul  atmosphere,  and 
dingy  and  sordid  surroundings,  it  is  very  obvious 
that  to  a  large  part  of  working  mankind,  the 
benefits  of  the  much  vaunted  division  of  labour 
have  been  accompanied  by  very  serious  draw- 
backs. The  best  that  can  be  said  is  that  if  it 
had  not  been  for  the  division  of  labour  a  large 
number  of  them  could  never  have  come  into 
existence  at  all;  and  the  question  remains 
whether  any  sort  of  existence  is  better  than  none. 
In  the  case  of  a  nation  the  process  of  specializa- 
tion has  not,  for  obvious  reasons,  gone  nearly  so 
far.  Every  country  does  a  certain  amount  of 
farming  and  of  seafaring  (if  it  has  a  seaboard) 
and  of  manufacturing.  But  the  tendency  has 
been  towards  increasing  specialization,  and  the 


158  Nationalism  and  Finance 

last  results  of  specialization,  if  carried  to  its 
logical  end,  are  not  nice  to  forecast.  "It  is  not 
pleasant,"  wrote  a  distinguished  statistician, 
"to  contemplate  England  as  one  vast  factory,  an 
enlarged  Manchester,  manufacturing  in  semi- 
darkness,  continual  uproar,  and  at  an  intense 
pressure  for  the  rest  of  the  world.  Nor  would  the 
continent  of  America,  divided  into  square,  num- 
bered fields,  and  cultivated  from  a  central  station 
by  electricity,  be  an  ennobling  spectacle."* 

It  need  not  be  said  that  the  horrible  con- 
sequences of  specialization  depicted  by  Dr. 
Bowley  need  not  necessarily  have  happened, 
even  if  its  effects  had  been  given  free  play. 
But  the  interesting  point  about  his  picture,  at 
the  present  moment,  is  the  fact  that  it  was 
drawn  from  the  purely  economic  and  social 
point  of  view.  He  questioned  whether  it  was 
really  to  the  advantage  of  a  nation,  regarding 
only  its  own  comfort  and  well-being,  to  allow 
specialization  to  go  beyond  a  certain  point.  It 
had  already  arrived  at  a  point  at  which  land 
was  going  out  of  cultivation  in  England,  and 

*  England's  Foreign  Trade  in  the  Nineteenth  Century,  p.  16,  by  Dr. 
A.  L.  Bowley. 


Effects  of  Specialization  159 

was  being  more  and  more  regarded  as  a  park, 
pleasure  ground,  and  sporting  place  for  people 
who  made,  or  whose  forbears  had  made,  fortunes 
out  of  commerce  and  finance,  and  less  and  less 
as  a  means  for  supplying  food  for  her  workers, 
and  raw  material  for  her  industries.  The  country 
workers  were  going  to  the  new  countries  that  her 
capital  was  opening  up,  or  into  the  towns  to 
learn  industrial  crafts,  or  taking  services  as 
gamekeepers,  grooms,  or  chauffeurs,  with  the 
well-to-do  classes  who  earned  their  profits  from 
industry  or  business.  Even  before  the  war  there 
was  a  growing  scarcity  of  labour  to  grow  and 
harvest  even  the  lessened  volume  of  England's 
agricultural  output.  Dr.  Bowley's  picture  was 
far  from  being  realized  and  even  if  the  process  of 
specialization  had  gone  on,  it  may  be  hoped  that 
the  blackest  of  its  horrors  would  never  have  come 
to  pass. 

Then  came  the  European  war,  which  went 
far  to  undermine  the  great  underlying  assump- 
tion on  which  the  free  interchange  of  capital 
among  nations  and  the  consequent  specialization 
that  proceeded  from  it,  was  taken  to  be  a  safe 
and  sound  policy.  This  assumption  was  in 


160  Nationalism  and  Finance 

effect,  that  the  world  was  civilized  to  a  point  at 
which  there  was  no  need  to  fear  that  its  whole 
economic  arrangements  would  be  upset  by  war. 
We  now  know  that  the  world  was  not  civilized 
to  this  point,  and  is  a  very  long  way  from  being 
so,  that  the  ultimate  appeal,  at  least  in  the 
Eastern  hemisphere,  is  still  to  "arms  and  the 
man, "  and  that  its  inhabitants  have  still  to  be 
careful  to  see  that  their  trade  and  industry  are 
carried  on  in  such  a  way  as  to  be  least  likely  to 
be  hurt  if  ploughshares  have  suddenly  to  be 
beaten  into  swords.  At  first  sight,  this  is  a 
somewhat  tragical  discovery,  but  it  carries  with 
it  certain  consolations.  If  the  apparent  civiliza- 
tion evolved  by  the  nineteenth  century  had  been 
good  and  wholesome,  it  might  have  been  really 
sad  to  find  that  it  was  only  a  thin  veneer  laid 
over  a  structure  that  man's  primitive  passions 
might  at  any  moment  overturn.  In  fact,  the 
apparently  achieved  civilization  was  so  grossly 
material  in  its  successes,  so  forcibly  feeble  in  its 
failures,  so  beset  with  vulgarity  at  its  summit  and 
undermined  by  destitution  at  its  base,  that  even 
the  horrors  of  the  present  war,  with  its  appalling 
loss  of  the  best  lives  of  the  chief  nations  of  the 


The  War's  Lesson  161 

earth,  may  be  a  blessing  to  mankind  in  the  long 
run  if  they  purge  its  notions  about  the  things 
that  are  worth  trying  for. 

At  least  the  war  is  teaching  England  that  the 
wealth  of  a  nation  is  not  a  pile  of  commodities 
to  be  frittered  away  in  vulgar  ostentation  and 
stupid  self-indulgence,  but  the  number  of  its 
citizens  who  are  able  and  ready  to  play  the  man 
as  workers  or  fighters  when  a  time  of  trial  comes. 
"National  prosperity,"  says  Cobbett,  "shows 
itself  ...  in  the  plentiful  meal,  the  comfortable 
dwelling,  the  decent  furniture  and  dress,  the 
healthy  and  happy  countenances,  and  the  good 
morals  of  the  labouring  classes  of  the  people." 
So  he  wrote,  in  Newgate  gaol,  in  1810.*  Since 
then  many  reformers  have  preached  the  same 
sound  doctrine,  but  its  application  has  made 
poor  progress,  in  relation  to  the  growth  of  riches 
in  the  same  period.  If  England  now  decides 
to  put  it  into  practice,  she  will  not  long  tolerate 
the  existence  in  her  midst  of  disease  and  destitu- 
tion, and  a  system  of  distribution  of  the  world's 
goods  which  gives  millions  of  her  population  no 
chance  of  full  development. 

*  Paper  against  Gold,  Letter  III. 


1 62  Nationalism  and  Finance 

We  need  not,  then,  stay  to  shed  tears  over  the 
civilization,  such  as  it  was,  which  Europe  thought 
it  had  and  had  not.  Its  good  points  will  endure, 
for  evil  has  a  comfortable  habit  of  killing  itself 
and  those  who  work  it.  All  that  we  are  con- 
cerned with  at  this  moment  is  the  fact  that  its 
downfall  has  shaken  an  article  in  England's 
economic  faith  which  taught  her  that  specializa- 
tion was  a  cause  of  so  much  more  good  than  evil, 
that  its  development  by  the  free  spreading  of 
her  capital  all  over  the  world,  wherever  the 
demand  for  it  gave  most  profit  to  the  owner,  was 
a  tendency  to  be  encouraged,  or  at  least  to  be 
left  free  to  work  out  its  will.  This  was  true 
enough  to  be  a  platitude  as  long  as  she  could 
rely  on  peace.  England's  capital  went  forth  and 
fertilized  the  world,  and  out  of  its  growing 
produce  the  world  enriched  her.  As  the  world 
developed  its  productive  power,  its  goods  poured 
into  her,  as  the  great  free  mart  where  all  men 
were  welcome  to  sell  their  wares.  These  goods 
came  in  exchange  for  her  goods  and  services, 
and  the  more  she  bought  the  more  she  sold. 
When  other  nations  took  to  dealing  direct  with 
one  another,  they  wanted  her  capital  to  finance 


Peace  and  Specialization  163 

the  business,  and  her  ships  to  carry  the  goods. 
The  world  as  a  whole  could  not  grow  in  wealth 
without  enriching  the  people  that  was  the 
greatest  buyer  and  seller,  the  greatest  money- 
lender and  the  greatest  carrier.  It  was  all  quite 
sound,  apart  from  the  danger  depicted  by  Dr. 
Bowley,  as  long  as  there  was  peace,  or  as  long  as 
the  wars  that  happened  were  sufficiently  re- 
stricted in  their  area  and  effect.  But  now  we  have 
seen  that  war  may  happen  on  such  a  scale  as  to 
make  the  interchange  of  products  between 
nations  a  source  of  grave  weakness  to  those  who 
practise  it,  if  it  means  that  they  are  thereby  in 
danger  of  finding  themselves  at  war  with  the 
providers  of  things  that  they  need  for  subsistence 
or  for  defence. 

Another  lesson  that  the  war  has  taught  us 
is  that  modern  warfare  enormously  increases 
the  cost  of  carriage  by  sea,  because  it  shuts  up 
in  neutral  harbours  the  merchant  ships  of  the 
powers  that  are  weaker  on  the  sea,  and  makes 
huge  calls,  for  transport  purposes,  on  those  of 
the  powers  which  are  in  the  ascendant  on  the 
water.  This  increase  in  the  cost  of  sea  carriage 
adds  to  the  cost  of  all  goods  that  come  by  sea, 


164  Nationalism  and  Finance 

and  is  a  particularly  important  item  in  the  bill 
that  England,  as  an  island  people,  has  to  pay  for 
the  luxury  of  war.  It  is  true  that  much  of  the 
high  price  of  freight  goes  into  the  pockets  of  her 
shipowners,  but  they,  being  busy  with  transport 
work  for  the  Government,  cannot  take  nearly  so 
much  advantage  of  it  as  the  shipmasters  of 
neutral  countries. 

The  economic  argument,  then,  that  it  pays 
best  to  make  and  grow  things  where  they  can 
best  be  made  and  grown  remains  just  as  true 
as  ever  it  was,  but  it  has  been  complicated  by 
a  political  objection  that  if  a  country  happens  to 
go  to  war  with  a  nation  that  has  supplied  raw 
material,  or  semi-raw  material,  for  industries 
that  are  essential  to  its  commercial  if  not  to  its 
actual  existence,  the  good  profits  made  in  time 
of  peace  are  likely  to  be  wiped  out,  or  worse,  by 
the  extent  of  the  inconvenience  and  paralysis  that 
this  dependence  brings  with  it  in  time  of  war. 
And  even  if  it  is  not  at  war  with  its  providers, 
the  greater  danger  and  cost  of  carriage  by  sea, 
when  war  is  afoot,  makes  people  in  England 
question  the  advantage  of  the  process,  for 
example,  by  which  England  has  developed  a 


War  and  Specialization  165 

foreign  dairying  industry  with  her  capital,  and 
learnt  to  depend  on  it  for  a  large  part  of  her 
supply  of  eggs  and  butter,  while  at  home  she 
has  seen  a  great  magnate  lay  waste  farms  in 
order  to  make  fruitful  land  into  a  wilderness  for 
himself  and  his  deer.  It  may  have  paid  her  to 
let  this  be  done  if  she  was  sure  of  peace,  but  now 
that  they  have  seen  what  modern  warfare  means, 
when  it  breaks  out  on  a  big  scale,  Englishmen 
are  beginning  to  think  that  people  who  make 
bracken  grow  in  place  of  wheat,  in  order  to 
improve  what  auctioneers  call  the  amenities  of 
their  rural  residences,  are  putting  their  personal 
gratification  first  in  a  question  which  is  of 
national  importance. 

We  may  seem  to  have  strayed  far  from  the 
problems  of  International  Finance  and  the  free 
interchange  of  capital  between  countries,  but 
in  fact  we  are  in  the  very  middle  of  them, 
because  they  are  so  complicated  and  diverse 
that  they  affect  nearly  every  aspect  of  the 
national  life  of  a  country  like  England.  By 
sending  capital  abroad  she  makes  other  coun- 
tries produce  for  her  and  so  helps  a  tendency 
by  which  she  grows  less  at  home,  and  exports 


*66  Nationalism  and  Finance 

coupons,  or  demands  for  interest,  instead  of  the 
present  produce  of  her  citizens'  brains  and 
muscles ;  and  she  does  much  more  than  that,  for 
she  thereby  encourages  the  best  of  her  workers 
to  leave  her  shores  and  seek  their  fortunes  in  the 
new  lands  which  her  capital  opens  up.  When 
she  exports  capital  it  goes  in  the  shape  of  goods 
and  services,  and  it  is  followed  by  an  export  of 
men,  who  go  to  lands  where  land  is  plentiful 
and  cheap,  and  men  are  scarce  and  well  paid. 
This  process  again  was  sound  enough  from  the 
purely  economic  point  of  view.  It  quickened  the 
growth  of  the  world's  wealth  by  putting  men  of 
enterprise  in  places  where  their  work  was  most 
handsomely  rewarded,  and  their  lives  were 
unhampered  by  the  many  bars  to  success  that 
remnants  of  feudalism  and  social  restrictions 
put  in  their  way  in  old  countries;  and  it  cleared 
the  home  labour  market  and  so  helped  the 
workers  in  their  uphill  struggle  for  better  con- 
ditions and  a  chance  of  a  real  life.  But  when 
the  guns  begin  to  shoot,  the  question  must  arise 
whether  England  was  wise  in  leaving  the  export 
of  capital,  which  has  such  great  and  complicated 
effects,  entirely  to  the  influence  of  the  higgling 


War  and  Capital  167 

of  the  market,  and  the  price  offered  by  the 
highest  bidder. 

Much  will  evidently  depend  on  the  way  in 
which  the  present  war  ends.  If  it  should  prove 
to  be,  as  so  many  hoped  at  its  beginning,  a 
"war  to  end  war,"  and  should  be  followed  by  a 
peace  so  well  and  truly  founded  that  we  need 
have  no  fear  for  its  destruction,  then  there  will 
be  much  to  be  said  for  leaving  economic  forces 
to  work  themselves  out  by  economic  means, 
subject  to  any  checks  that  their  social  effects 
may  make  necessary.  But  if,  as  seems  to  be 
probable,  the  war  ends  in  a  way  that  makes  other 
such  wars  quite  possible,  when  the  warring 
nations  have  all  recovered  from  the  exhaustion 
and  disgust  produced  by  the  present  one,  then 
political  expediency  may  overrule  economic 
advantage,  and  England  may  find  it  necessary  to 
consider  the  policy  of  restricting  the  export  of 
British  capital  to  countries  with  which  there 
is  no  chance  of  her  ever  being  at  war,  and 
especially  to  her  own  Dominions  oversea,  not 
necessarily  by  prohibitions  and  hard  and  fast 
rules,  but  rather  by  seeing  that  the  countries 
to  which  it  is  desirable  for  her  capital  to  go 


1 68  Nationalism  and  Finance 

may  have  some  advantage  when  they  appeal 
for  it. 

This  advantage  England's  colonial  Dominions 
already  possess,  both  from  the  sentiment  of 
investors,  which  is  a  strong  influence  in  their 
favour,  and  will  be  stronger  than  ever  after  the 
war,  and  from  legal  enactment  which  allows 
trustees  to  invest  trust  funds  in  their  loans. 
Probably  the  safest  course  would  be  to  leave 
sentiment  to  settle  the  matter,  and  pray  to 
Providence  to  supply  investors  with  sensible 
sentiments.  Actual  restraints  on  the  export  of 
capital  would  be  very  difficult  to  enforce,  for 
capital  is  an  elusive  commodity  that  cannot  be 
stopped  at  the  Customs  houses.  If  England 
lent  money  to  a  friendly  nation,  and  her  friend 
was  thereby  enabled  to  lend  to  a  likely  foe,  she 
would  not  have  mended  matters.  The  time  is 
not  yet  ripe  for  a  full  discussion  of  this  difficult 
and  complicated  question,  and  it  is  above  all 
important  that  Englishmen  should  not  jump  to 
hasty  conclusions  about  it  while  under  the 
influence  of  the  feverish  state  of  mind  produced 
by  war.  The  war  has  shown  them  that  their 
wealth  was  a  sure  and  trusty  weapon,  and  much 


England's  Trusty  Weapon         169 

of  the  strength  of  this  weapon  they  owe  to  their 
activity  in  International  Finance. 

The  problems  considered  in  this  chapter  have, 
so  far,  little  practical  meaning  for  Americans. 
Their  country,  with  its  vast  range  of  natural 
products  and  its  wealth  of  applied  mechanical 
skill,  is  so  versatile  in  its  manifold  activities 
that  it  is  able  to  carry  specialization  to  a  high 
degree  of  perfection  and  yet  be,  to  a  great  extent, 
self-sufficing.  Nevertheless  the  connexion  be- 
tween International  Finance  and  specialization 
is  so  obvious  and  close  that  it  may  be  well  even 
for  Americans,  when  they  are  embarking  on  the 
former,  to  consider  carefully  the  consequences  of 
the  latter. 


CHAPTER  VIII 

REMEDIES    AND    REGULATIONS 

APART  from  the  political  measures  which  may 
be  found  necessary  for  the  regulation,  after  the 
war,  of  International  Finance,  it  remains  to 
consider  what  can  be  done  to  amend  the  evils 
from  which  it  suffers,  and  likewise  what,  if  any- 
thing, can  be  done  to  strengthen  mankind's  fin- 
ancial weapon,  and  sharpen  its  edge  to  help  us 
in  the  difficult  task  of  reconstruction  that  will 
follow  the  present  war,  however  it  may  end. 

It  has  been  shown  in  a  previous  chapter  that 
the  real  weaknesses  in  the  system  of  Inter- 
national Finance  arise  from  the  bad  use  made  of 
its  facilities  by  improvident  and  corrupt  borrow- 
ers, and  from  the  bigger  profits  attached,  in  the 
case  of  success,  to  the  more  questionable  kinds 
of  issues.  With  regard  to  the  latter  point  it  was 

also  shown  that  these  bigger  profits  may  be,  to  a 

170 


Stock  Exchange  Measures          171 

great  extent,  justified  by  the  fact  that  the  risk 
involved  is  much  greater;  since  in  the  case  of 
failure  a  weak  security  is  much  more  difficult  to 
finance  and  find  a  home  for  than  a  good  one.  It 
may  further  be  asked  why  weak  securities  should 
be  brought  out  at  all  and  whether  it  is  not  the 
business  of  financial  experts  to  see  that  nothing 
but  the  most  water-tight  issues  are  offered  to 
the  public.  Such  a  question  evidently  answers 
itself,  for  if  only  those  borrowers  were  allowed 
to  come  into  the  market  whose  credit  was  beyond 
doubt,  the  growth  of  young  communities  and  of 
budding  enterprises  would  be  strangled  and  the 
forward  movement  of  material  progress  would  be 
seriously  checked. 

It  is  sometimes  contended  that  much  more 
might  be  done  by  Stock  Exchange  Committees 
in  taking  measures  to  see  that  the  securities  to 
which  they  grant  quotations  and  settlements  are 
soundly  based.  If  this  view  is  to  prevail  in 
England,  its  victory  has  been  greatly  helped 
by  the  events  of  the  war,  during  which  the 
London  Stock  Exchange  has  seen  itself  regulated 
and  controlled  by  outside  authority  to  such  an 
extent  that  it  would  be  much  readier  than  it 


172         Remedies  and  Regulations 

was  two  years  ago  to  submit  to  regulations 
imposed  on  it  by  its  own  Committee  at  the 
bidding  of  the  Government.  Nevertheless, 
there  is  this  great  difficulty,  that  as  soon  as  a 
Stock  Exchange  begins  to  impose  other  than 
merely  formal  rules  upon  the  issue  of  securities 
under  its  authority,  the  public  very  naturally 
comes  to  the  conclusion  that  all  securities 
brought  out  under  its  sanction  may  be  relied 
on  as  absolutely  secure;  and  since  it  is  wholly 
impossible  that  the  Committee's  regulations 
could  be  so  strict  as  to  ensure  this  result  without 
imposing  limits  that  would  have  the  effect  of 
smothering  enterprise,  the  effect  of  any  such 
attempt  would  be  to  encourage  the  public  to 
pursue  a  happy-go-lucky  system  of  investing, 
and  then  to  blame  the  Stock  Exchange  if  ever 
it  found  that  it  had  made  a  mistake  and  had 
indulged  in  speculation  when  it  flattered  itself 
that  it  was  investing.  The  whole  question 
bristles  with  difficulties,  but  it  seems  hardly 
likely  that,  in  Europe  at  least,  the  Stock  Ex- 
change and  the  business  of  dealing  in  securities 
will  ever  be  quite  on  the  old  basis  again. 

In   any  attempt   that   is  made   to   regulate 


Elusive  Capital  173 

them,  however,  it  will  be  very  necessary  to 
remember  that  capital  is  an  extremely  elusive 
thing,  and  that  if  too  strict  rules  are  laid  down 
for  it,  it  very  easily  evades  them  by  transferring 
itself  to  other  centres.  If,  for  example,  the 
British  authorities  decide  that  only  such  and 
such  issues  are  to  be  made,  or  such  and  such 
securities  are  to  be  dealt  in  in  London,  they  will 
be  inviting  those  who  consider  such  regulations 
unfair  or  unwise  to  buy  a  draft  on  Paris  or  New 
York,  and  invest  their  money  in  a  foreign  centre. 
Capital  is  easily  scared,  and  is  very  difficult 
to  bottle  up  and  control,  and  if  any  guidance 
of  it  in  a  certain  direction  is  needed,  the  object 
would  probably  be  much  more  easily  achieved 
by  suggestion  than  by  any  attempt  at  hard  and 
fast  restriction,  such  as  worked  well  enough 
under  the  stress  of  war. 

Any  real  improvement  to  be  achieved  in 
the  system  by  which  investors  and  financiers 
have  hitherto  supplied  other  nations  with  capital 
will  ultimately  have  to  be  brought  about  by  a 
keener  appreciation,  both  by  issuing  houses  and 
investors,  of  the  kind  of  business  that  is  truly 
legitimate  and  profitable.  It  does  not  pay  in  the 


174         Remedies  and  Regulations 

long  run  to  supply  young  communities  with 
opportunities  for  outrunning  the  constable,  and 
it  is  possible  that  when  this  wholesome  platitude 
is  more  clearly  grasped  by  the  public,  no  issuing 
house  will  be  found  to  bring  out  a  loan  that  is  not 
going  to  be  used  for  some  definite  reproductive 
purpose,  or  to  float  a  company,  even  of  the  semi- 
speculative  kind,  the  prospects  of  which  have 
not  been  so  well  tested  that  the  shareholders  are 
at  least  bound  to  have  a  fair  chance  of  success. 
The  ideals  of  the  issuing  houses  have  so  far 
advanced  since  the  days  of  the  Honduras  scandal, 
that  in  the  time  of  the  late  war  in  the  Balkans 
none  could  be  found  to  father  any  financial 
operation  in  London  on  behalf  of  any  of  the 
warring  peoples.  It  only  remains  for  the  educa- 
tion of  the  investor  to  continue  the  progress  that 
it  has  lately  made,  for  the  waste  of  capital  by 
bad  investment  to  be  greatly  curtailed.  Prob- 
ably there  will  always,  as  long  as  the  present 
financial  basis  of  society  lasts,  be  outbursts  of 
speculation  in  which  a  greedy  pubKc  will  rush 
madly  after  certain  classes  of  stocks  and  shares, 
with  the  result  that  a  few  cool-headed  or  lucky 
gamblers  will  be  able  to  live  happily  ever  after  as 


Education  in  Finance  175 

gentlemen  of  ease  and  leisure,  if  they  feel  in- 
clined to  do  so,  and  transmit  comfortable  for- 
tunes to  their  descendants  for  all  time.  This  is 
the  debt  that  society  pays  for  its  occasional 
lapses  in  finance,  just  as  its  lapses  in  matters  of 
taste  are  paid  for  by  the  enriching  of  those  who 
provide  it  with  rubbishy  stuff  to  read,  or  rub- 
bishy shows  in  picture  palaces.  The  education 
of  the  individual  in  the  matter  of  spending  or 
investing  his  or  her  money  is  one  of  the  most 
pressing  needs  of  the  future,  and  only  by  its 
progress  can  the  evils  which  are  usually  laid  to 
the  door  of  finance  be  cured  by  being  attacked 
in  their  real  home.  In  the  meantime  much  might 
be  done  by  more  candid  publicity  and  clearer 
statements  in  prospectuses  of  the  objects  for 
which  money  lent  is  to  be  used  and  of  the  terms 
on  which  loan  issues  have  been  arranged.  Any 
reasonable  attempts  that  may  be  made  to  im- 
prove the  working  of  International  Finance  are 
certain  to  have  the  support  of  the  best  elements 
in  the  financial  districts  of  all  the  leading  centres. 
At  the  same  time  we  may  hope  that  as 
economic  progress  goes  slowly  ahead  over  the 
stepping  stones  of  uncomfortable  experience, 


176         Remedies  and  Regulations 

borrowing  countries  will  see  that  it  really  pays 
them  to  pay  their  yearly  bills  out  of  yearly 
taxes,  and  that  they  are  only  hurting  themselves 
when  they  mortgage  their  future  revenue  for 
loans,  the  spending  of  which  is  not  going  to 
help  them  to  produce  more  goods  and  so  raise 
more  revenue  without  effort.  War  is  the  only 
possible  excuse  for  asking  foreign  nations  to 
find  money  for  other  than  reproductive  purposes. 
In  time  of  war  it  can  be  justified,  even  as  an 
individual  can  be  justified  for  drawing  on  his 
capital  in  order  to  pay  for  an  operation  that  will 
save  his  life.  But  in  both  cases  it  leaves  both 
the  nation  and  the  individual  permanently  poorer 
and  with  a  continuous  burden  to  meet  in  the 
shape  of  interest  and  sinking  fund,  until  the 
loan  has  been  redeemed.  Loans  raised  at  home 
have  an  essentially  different  effect.  The  interest 
on  them  is  raised  from  the  taxpayers  and  paid 
back  to  the  taxpayers,  and  the  nation,  as  a 
whole,  is  none  the  poorer.  But  when  one  nation 
borrows  from  another  it  takes  the  loan  in  the 
form  of  goods  or  services,  and  unless  these  goods 
and  services  are  used  in  such  a  way  as  to  enrich 
it  and  help  it  to  produce  goods  and  services 


War's  Lesson  177 

itself,  it  is  bound  to  be  a  loser  by  the  bargain; 
because  it  has  to  pay  interest  on  the  loan  in 
goods  and  services  and  to  redeem  the  loan  by 
the  same  process,  and  if  the  loan  has  not  been 
used  to  increase  its  power  of  turning  out  goods 
and  services,  the  borrowing  country  is  inevitably 
in  the  same  position  as  a  spendthrift  individual 
who  has  pledged  his  income  for  an  advance  and 
spent  it  on  riotous  living. 

One  of  the  great  benefits  that  the  present 
war  is  working  is  that  it  is  teaching  young 
countries  to  do  without  continual  drafts  of 
fresh  capital  from  the  older  ones.  Instead  of 
being  able  to  finance  themselves  by  fresh 
borrowing,  they  have  had  to  close  their  capital 
accounts  for  the  time  being,  and  develop 
themselves  out  of  their  own  resources.  It  is 
a  very  useful  experience  for  them,  and  is  teach- 
ing them  lessons  that  will  stand  them  in  good 
stead  for  some  time  to  come.  For  the  old 
countries,  when  the  war  is  over,  will  have  prob- 
lems of  their  own  to  face  at  home,  and  will  not 
be  able  at  once  to  go  back  to  the  old  system 
of  placing  money  abroad,  even  if  they  should 
decide  that  the  experiences  of  war  have  raised 


178         Remedies  and  Regulations 

no  objections  to  their  doing  so  with  the  old 
indiscriminate  freedom. 

It  is  easy,  however,  to  exaggerate  the  effect 
of  the  war  on  England's  power  to  finance  other 
peoples.  Pessimistic  observers,  with  a  pacifist 
turn  of  mind,  who  regard  all  war  as  a  hideous 
barbarism  and  refuse  to  see  that  anything  good 
can  come  out  of  it,  are  apt  in  these  days  to  make 
our  flesh  creep  by  telling  us  that  war  will  in- 
evitably leave  Europe  so  exhausted  and  im- 
poverished that  its  financial  future  is  a  prospect 
of  unmitigated  gloom.  They  talk  of  the  whole 
cost  of  the  war  as  so  much  destruction  of  capital 
and  maintain  that  by  this  destruction  England 
will  be  for  some  generations  in  a  state  of  com- 
parative destitution.  These  gloomy  forecasts 
may  be  right,  but  I  hope  and  believe  that  they 
will  be  found  to  have  been  nightmares,  evolved 
by  depressed  and  prejudiced  imaginations.  War 
destroys  capital  when  and  where  actual  destruc- 
tion of  property  takes  place,  as  now  in  Belgium, 
Northern  France,  and  other  scenes  of  actual 
warfare,  and  on  the  sea,  where  a  large  number 
of  ships,  though  small  in  relation  to  the  total 
tale  of  the  merchant  navies  of  the  world,  have 


War  and  Capital  179 

been  sunk  and  destroyed.  Destruction  in  this 
sense  has  only  been  wrought,  so  far,  in  limited 
areas.  In  so  far  as  agricultural  land  has  been 
wasted,  kindly  nature,  aided  by  industry  and 
science,  will  soon  restore  its  productive  power. 
In  so  far  as  factories,  railways,  houses,  and  ships 
have  been  shattered,  man's  power  to  make, 
increased  to  a  marvellous  extent  by  modern 
mechanical  skill,  will  repair  the  damage  with 
an  ease  and  rapidity  such  as  no  previous  age 
has  witnessed. 

In  another  sense  it  may  be  argued  that  war 
destroys  capital  in  that  it  prevents  its  being 
accumulated,  but  this  is  a  distortion  of  the 
meaning  of  the  word  destroy.  If  it  had  not 
been  for  the  war,  England  would  have  been 
saving  her  usual  three  to  four  hundred  millions 
a  year  and  putting  the  money  to  productive 
uses,  in  so  far  as  she  did  not  lend  it  to  spend- 
thrift nations  or  throw  it  away  on  unprofitable 
ventures.  If  she  had  invested  it  well,  it  would 
have  made  her  and  the  rest  of  the  world  richer. 
Instead  of  doing  so  England  is  spending  her 
savings  on  war  and  consequently  is  not  growing 
richer.  But  when  the  war  is  over  her  material 


i8o         Remedies  and  Regulations 

productive  power  will  be  as  great  as  ever,  except 
for  the  small  number  of  her  ships  that  have 
been  sunk  or  the  small  amount  of  damage  done 
to  her  by  enemy  aircraft.  Her  railways  and 
factories  may  be  somewhat  behindhand  in  up- 
keep, but  that  will  soon  be  made  good,  and 
against  that  item  on  the  debit  side,  she  can  set 
the  great  new  organization  for  munition  works, 
part  of  which,  at  least,  will  be  available  for 
peaceful  production  when  the  time  for  peace  is 
ripe. 

It  is  a  complete  mistake  to  suppose  that  war 
can  be  carried  on  out  of  accumulated  capital, 
which  is  thereby  destroyed.  All  the  things  and 
services  needed  for  war  have  to  be  produced 
as  the  war  goes  on.  The  warring  nations  start 
with  a  stock  of  ships  and  guns  and  military  and 
naval  stores,  but  the  wastage  of  them  can  only 
be  made  good  by  the  production  of  new  stuff 
and  new  clothes  and  food  for  the  soldiers  and 
new  services  rendered  as  the  war  goes  on.  This 
new  production  may  be  done  either  by  the  war- 
ring powers  or  by  neutrals,  and  if  it  is  done  by 
neutrals,  the  warring  powers  can  pay  for  it  out 
of  capital  by  selling  their  securities  or  by  pledging 


War  and  Capital  181 

their  wealth.  In  so  far  as  this  is  done  the 
warring  powers  impoverish  themselves  and  the 
neutrals  are  enriched,  but  the  world's  capital  as 
a  whole  is  not  impaired.  If  Englishmen  sell 
Pennsylvania  Railroad  bonds  to  Americans, 
and  buy  shells  with  the  proceeds,  they  are  there- 
by poorer  and  Americans  are  richer,  but  the 
earning  power  of  the  Pennsylvania  Railroad  is 
not  altered.  It  may  be,  if  England  conducts 
the  war  wastefully,  and  her  citizens  refuse  to 
meet  its  cost  by  their  own  self-denial — going 
without  things  themselves  so  that  they  can  save 
money  to  lend  to  the  Government  for  the  war — 
that  they  will  pledge  their  property  and  sell  what 
of  it  they  can  sell  to  neutrals,  to  such  an  extent 
that  they  will  be  seriously  poorer  at  the  end  of  it. 
At  present  they  are  not  selling  and  pledging 
their  capital  wealth  any  faster  than  they  are 
lending  to  their  Allies;  and  if  they  pull  them- 
selves up  short,  and  exercise  the  necessary 
self-denial,  seeing  that  they  must  pay  for  the 
war  in  the  long  run  out  of  their  own  pockets, 
and  that  far  the  cheapest  and  cleanest  policy 
is  to  do  so  now,  and  if  the  war  does  not  last  too 
long,  there  is  no  reason  why  it  should  impoverish 


182          Remedies  and  Regulations 

England   to  an   extent   that  will   cripple   her 
seriously. 

It  is  true  that  she  will  have  lost  an  appalling 
number  of  the  best  of  her  manhood,  and  this  is  a 
loss  that  is  irreparable  in  many  of  its  aspects. 
But  from  the  purely  material  point  of  view  she 
can  set  against  it  the  great  increase  in  the  pro- 
ductive power  of  those  that  are  left  behind, 
through  the  lessons  that  the  war  has  taught  her 
in  using  the  store  of  available  energy  that  was 
idle  among  her  citizens  before.  England  will 
have  learnt  to  work  as  she  never  worked  before, 
and  she  will  have  learnt  that  many  of  the  things 
on  which  she  used  to  waste  her  money  and 
energy  were  unworthy  of  her  at  all  times  and 
especially  at  a  time  of  national  crisis.  If  she  can 
only  recognize  that  the  national  crisis  will  go 
on  after  the  war,  and  will  go  on  until  she  has 
made  her  old  country  civilized  in  the  real  sense 
of  the  word — that  is,  free  from  destitution  and 
the  vice  and  dirt  and  degradation  and  disease 
that  go  with  it,  then  her  power  of  recovery  after 
the  war  will  be  illimitable,  and  she  will  go  for- 
ward to  a  new  standard  of  wealth  and  national 
duty  that  will  leave  the  dingy  ideals  of  the 


War's  Regeneration  183 

nineteenth  century  behind  like  a  bad  dream. 
This  may  seem  somewhat  irrelevant  to  the 
question  of  International  Finance,  but  it  is  not 
so.  England  led  the  way  in  spreading  her 
capital  over  the  world,  with  little  or  no  regard 
for  the  consequences  of  this  policy  on  the  con- 
dition of  her  population  at  home.  She  has  now, 
in  the  great  regeneration  that  this  war  has 
brought,  and  will  bring  in  still  greater  measure, 
to  show  that  she  can  still  make  and  save  capital 
faster  than  ever,  by  working  harder  and  spend- 
ing her  money  on  improving  her  heritage,  in- 
stead of  on  frivolity  and  self-indulgence.  Then 
she  will  still  be  free  to  lend  money  to  borrowers 
who  will  use  it  well,  and  at  the  same  time  have 
plenty  to  spare  for  wise  use  at  home  in  clearing 
the  blots  off  her  civilization. 


INDEX 


ACCEPTANCES,  of  banks  and 
firms,  27,  37 

America,  as  international  finan- 
cier, 76;  trade  expansion  of, 
helped  by  England,  88 

Armament  firms  and  bad 
finance,  137,  138 

BANK  OF  ENGLAND,  position 
°f»  3!»  32»  weekly  return  of , 
33 

Banks,  bills  of  exchange  held 
by,  26  seq.;  functions  of,  36 
seq.',  money  deposited  with, 

25  seq.;    specimen    balance 
sheet  of,  35  ^ 

Bearer  securities,  56 

Bill-brokers,  37,  38 

Bills  of  exchange,  meaning   of, 

26  seq.;   on    London,     popu- 
larity of,  29, 30;  uses  of,  40,  41 

Bonds,  description  of,  56 

Bowley,  Dr.,  on  specialization, 
158 

Brailsford,  Mr.,  on  Egypt  and 
finance,  101,  102 

Brazil,  financial  embarrass- 
ments of,  74;  funding  ^scheme 
for,  75 

CANADA  lends  to  England,  76 
Capital,  bad  effects  of  export 
of,  1 66;  difficulty  of  control- 
ling, 168,  173;  definition  of, 
4,  17;  function  of,  3  seq.;  how 
acquired,  16;  plenty  of,  ad- 
vantageous to  workers,  19,  20; 
reward  of,  2  seq. 


Charles  II,  dukedoms  founded 

by,  14,  15 
China  and  international  finance, 

1 08 
Cobbett  on  national  prosperity, 

161 

Colonial    investments,    advan- 
tages possessed  by,  168 
Companies'     securities,     classes 

of,  59;  issue  of,  57 
Coupons,  description  of,  56 
Crammond,  Mr.,  on  financiers 

and  peace,  96 
Cumulative,      preference,      61; 

sinking  fund,  54 

DEBENTURE  stocks,  59 
Discount,  market  rate  of,  38 

EGYPT  and  finance,  101  seq. 

"FENN  on  the  Funds,"  on 
diplomacy  and  finance,  109 

Finance  and  industry,  77,  78, 
133;  as  peace-missionary,  93 
seq.;  benefits  of,  86  seq.; 
defined,  i;  dependent  on  in- 
dustry, 28,  29,  41;  effects  of 
war  on,  93,  94 

Foreign  Office  and  finance,  107 
seq. 

France,  loan  issuing  in,  49 

Freights,  effect  of  war  on,  163, 
164 


GEOGRAPHICAL         distribution, 
investment  by,  24,  25 


185 


1 86 


Index 


German  finance  and  diplomacy, 

109 
German     industry     helped     by 

English  finance,  88 
Governments,  borrowing  by,  44 

seq. 

HONDURAS  loans,   Select  Com- 
mittee's report  on,  119  seq. 

"INCOME,"  Dr.  Nearing  on,  7 
Industry     the     foundation     of 

finance,  28,  29 
Inherited  wealth,  II  seq. 
Interest,  the  price  of  capital,  2,  3 
Interest    claims,    as    article    of 

export,  83,  84 
Issuing    houses,    responsibilities 

of,  139  seq. 

JEWS  and  finance,  1 14  seq. 
Journalism  in  the  City,  51,  52 

KINGLAKE  on  Egypt,    103;  on 
Jews  of  Smyrna,  115 

LIMITED  liability,  system  of,  71 
Loans,  issue  of,  46,  47  seq. 
London,  strength  of,  in  credit 
matters,  30 

MEXICO,     revolution     and  de- 
fault in,  74 
Morocco   crisis   and   financiers, 

95 

Municipalities,    borrowing    by, 

47 

NEARING,     DR.,    on    capital's 

reward,  7,  8 
New  York  as  financial  centre, 

30 


PHILIP  II  repudiates  debts,  70 
Preference  securities,  59,  6 1 
Profit,    distinguished    from    in- 
terest,    58;    the    reward    of 
capital,  2,  3 

Prospectuses,  fuller  statement 
desirable  in,  175;  terms  of, 
50  seq.,  52 

Public,  the,  the  modern  dis- 
penser of  wealth,  15  seq. 

REGISTERED  stocks,  56 
Risk,  inseparable  from  industry, 
23 

SINKING  FUND,  working  of,  54 
Snowden,  Mr.  Philip,  on  finance 

and  diplomacy,  93,  94 
South  African  War  and  finance, 

104,  105 
Specialization,  dangers  and  evils 

of,  155  seq. 

State,  as  saver  of  capital,  21 
Stock    Exchange,    as    regulator 

of  new  issues,  171,  172;  effect 

of  war  on,  98;  securities  dealt 

in  on,  44  seq. 
Stock  markets,  fluctuations  of, 

63,  64;  international  relations 

of,  64 

TRADE  balance,  83,  84 

UNDERWRITING,  of  loans,  48, 
50;  risk  involved  by,  55 

VENEZUELA  and  German  diplo- 
macy, no 

WAR,  effects  of,  on  finance,  95, 
96;  lessons  taught  by,  163 
seq.,  177  seq. 


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